SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K
(Mark One)

[X]        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
           OF THE SECURITIES AND EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
                   For the fiscal year ended December 31, 1998

                                       OR

[  ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
          SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

                         Commission file number 1-10311

                         KANEB PIPE LINE PARTNERS, L.P.

             (Exact name of Registrant as specified in its Charter)

       Delaware                                           75-2287571
(State  or  other  jurisdiction  of           (IRS Employer Identification No.)
incorporation  or  organization)  

   2435 North Central Expressway
          Richardson, Texas                                         75080
(Address of principal executive offices)                         (zip code)

       Registrant's telephone number, including area code: (972) 699-4000

           Securities registered pursuant to Section 12(b) of the Act:

                                                         Name of each exchange
      Title of each class                                 on which registered
             Units                                      New York Stock Exchange

        Securities registered pursuant to Section 12(g) of the Act: None

         Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
Registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes X No

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K (Subsection 229.405 of this chapter) is not contained
herein,  and will not be contained,  to the best of registrant's  knowledge,  in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K.[ ]

         Aggregate  market value of the voting Units held by  non-affiliates  of
the registrant:  $402,081,103. This figure is estimated as of March 15, 1999, at
which date the  closing  price of the  Registrant's  Units on the New York Stock
Exchange was $31.6875 per Unit and assumes that only the General  Partner of the
Registrant  (the  "General  Partner"),  officers  and  directors  of the General
Partner and its parent and wholly owned  subsidiaries of the General Partner and
its parent were affiliates.

         Number  of Units of the  Registrant  outstanding  at  March  15,  1999:
16,060,000.


<PAGE>
                                     PART I


Item I.    Business


General

         Kaneb Pipe Line Partners,  L.P., a Delaware  limited  partnership  (the
"Partnership"),  is engaged in the refined petroleum  products pipeline business
and the  terminaling  of petroleum  products and  specialty  liquids.  Formed in
September  1989 to acquire,  own and operate the pipeline  system and operations
that had been  previously  conducted  by Kaneb  Pipe Line  Company,  a  Delaware
corporation  ("KPL"  or the  "Company"),  since  1953,  KPL owns a  combined  2%
interest as general  partner of the Partnership and of Kaneb Pipe Line Operating
Partnership,  L.P., a Delaware limited partnership  ("KPOP").  The Partnership's
pipeline  operations are conducted through KPOP, of which the Partnership is the
sole  limited  partner  and KPL is the sole  general  partner.  The  terminaling
business of the  Partnership is conducted  through Support  Terminals  Operating
Partnership,  L.P.  ("STOP"),  and its  affiliated  partnerships  and  corporate
entities,  which operate  under the trade names "ST  Services" and  "StanTrans,"
among others. KPOP and STOP are, collectively with their subsidiaries,  referred
to as the "Operating  Partnerships."  KPL is a wholly-owned  subsidiary of Kaneb
Services, Inc., a Delaware corporation ("Kaneb") (NYSE: KAB).


Products Pipeline Business


         Introduction

         The  Partnership's   pipeline   business  consists   primarily  of  the
transportation of refined petroleum  products in Kansas,  Nebraska,  Iowa, South
Dakota, North Dakota, Colorado and Wyoming, as a common carrier. The Partnership
owns and operates  two common  carrier  pipelines  (the  "Pipelines")  described
below.

          East Pipeline

         Construction  of the East  Pipeline  commenced in the 1950s with a line
from southern Kansas to Geneva,  Nebraska.  During the 1960s,  the East Pipeline
was extended north to its present  terminus at Jamestown,  North Dakota.  In the
1980's,  the lines from Geneva,  Nebraska to North Platte,  Nebraska and the 16"
line from McPherson,  Kansas to Geneva,  Nebraska were built and the Partnership
acquired a 6" pipeline from Champlin Oil Company,  a portion of which originally
ran  south  from  Geneva,   Nebraska  through  Windom,   Kansas  terminating  in
Hutchinson,  Kansas. In 1997, the Partnership completed construction of a new 6"
pipeline from Conway,  Kansas to Windom, Kansas (approximately 22 miles north of
Hutchinson)  that allows the  Hutchinson  terminal to be supplied  directly from
McPherson;  a significantly  shorter route than was previously used. As a result
of this pipeline becoming operational, a 158 mile segment of the former Champlin
line was shut down,  including a terminal  located at  Superior,  Nebraska.  The
other end of the line runs northeast  approximately 175 miles, crossing the main
pipeline  at  Osceola,  Nebraska,  continuing  through a terminal  at  Columbus,
Nebraska, and later interconnecting with the Partnership's  Yankton/Milford line
to terminate at Rock Rapids,  Iowa. In December  1998,  KPOP acquired from Amoco
Oil Company a 175 mile  pipeline  that runs from Council  Bluffs,  Iowa to Sioux
Falls,  South Dakota and the terminal at Sioux Falls. On December 31, 1998 KPOP,
pursuant  to  its  option,   purchased  the  203  mile  North  Platte  line  for
approximately  $5 million at the end of a lease.  In January  1999, a connection
was  completed  to  service  the  Sioux  Falls  terminal  through  the main East
Pipeline.

         The East  Pipeline  system  also  consists of 16 product  terminals  in
Kansas,  Nebraska,  Iowa,  South  Dakota and North  Dakota  with  total  storage
capacity of approximately 3.5 million barrels and an additional 23 product tanks
with total storage  capacity of  approximately  922,000 barrels at its tank farm
installations at McPherson and El Dorado, Kansas. The system also has six origin
pump  stations in Kansas and 38 booster  pump  stations  throughout  the system.
Additionally,  the system maintains various office and warehouse facilities, and
an extensive  quality control  laboratory.  KPOP owns the entire 2,090 mile East
Pipeline.  KPOP leases office space for its operating  headquarters  in Wichita,
Kansas.

         The East Pipeline  transports  refined  petroleum  products,  including
propane,  received  from  refineries  in southeast  Kansas and other  connecting
pipelines  to  its  terminals  along  the  system  and  to  receiving   pipeline
connections in Kansas.  Shippers on the East Pipeline  obtain refined  petroleum
products  from  refineries  connected  to the East  Pipeline  or  through  other
pipelines directly connected to the pipeline system.  Five connecting  pipelines
can deliver  propane for shipment  through the East Pipeline from gas processing
plants in Texas, New Mexico, Oklahoma and Kansas.

         West Pipeline

         KPOP  acquired  the West  Pipeline in February  1995,  through an asset
purchase  from Wyco Pipe Line  Company  for a purchase  price of $27.1  million,
increasing the Partnership's  pipeline business in South Dakota and expanding it
into Wyoming and Colorado.  The West Pipeline system includes  approximately 550
miles of pipeline in Wyoming,  Colorado  and South  Dakota,  four truck  loading
terminals  and numerous pump stations  situated  along the system.  The system's
four  product  terminals  have a total  storage  capacity  of over  1.7  million
barrels.

         The West Pipeline originates at Casper, Wyoming and travels east to the
Strouds station,  where it serves as a connecting  point with Sinclair's  Little
America refinery and the Seminoe pipeline that transports product from Billings,
Montana-area  refineries.  From Strouds,  the West Pipeline  continues  easterly
through its 8" line to Douglas,  Wyoming,  where a 6" pipeline  branches  off to
serve the  Partnership's  Rapid City,  South Dakota terminal  approximately  190
miles away. The Rapid City terminal has a three bay,  bottom-loading  truck rack
and storage tank  capacity of 256,000  barrels.  The 6" pipeline  also  receives
product  from  Wyoming  Refining's  pipeline at a  connection  located  near the
Wyoming/South Dakota border,  approximately 30 miles south of Wyoming Refining's
Newcastle,  Wyoming  refinery.  From  Douglas,  the  Partnership's  8"  pipeline
continues southward through a delivery point at the Burlington Northern junction
to the  terminal at  Cheyenne,  Wyoming.  The  Cheyenne  terminal has a two bay,
bottom-loading  truck rack,  storage tank capacity of 345,000 barrels and serves
as a receiving  point for  products  from the  Frontier  Oil & Refining  Company
refinery  at  Cheyenne,  as well as a  product  delivery  point to the  Cheyenne
pipeline.  From the  Cheyenne  terminal,  the 8"  pipeline  extends  south  into
Colorado to the Dupont  terminal  located in the Denver  metropolitan  area. The
Dupont terminal is the largest terminal on the West Pipeline system,  with a six
bay,  bottom-loading  truck rack and tankage capacity of 692,000 barrels. The 8"
pipeline  continues to the Commerce  City  station,  where the West Pipeline can
receive from and transfer  product to the Ultramar  Diamond  Shamrock and Conoco
refineries and the Phillips  Petroleum  terminal.  From Commerce City, a 6" line
continues south 90 miles where the system  terminates at the Fountain,  Colorado
terminal  serving the Colorado  Springs area.  The Fountain  terminal has a five
bay, bottom-loading truck rack and storage tank capacity of 366,000 barrels.

         The West Pipeline system parallels the  Partnership's  East Pipeline to
the west. The East Pipeline's North Platte line terminates in western  Nebraska,
approximately 200 miles east of the West Pipeline's Cheyenne,  Wyoming terminal.
Conoco's  Cheyenne pipeline runs from west to east from the Cheyenne terminal to
near the East Pipeline's North Platte  terminal,  although a portion of the line
from Sidney,  Nebraska  (approximately  100 miles from Cheyenne) to North Platte
has been deactivated. The West Pipeline serves Denver and other eastern Colorado
markets and supplies jet fuel to Ellsworth  Air Force Base at Rapid City,  South
Dakota, as compared to the East Pipeline's  largely  agricultural  service area.
The West  Pipeline has a relatively  small number of shippers,  who,  with a few
exceptions, are also shippers on the Partnership's East Pipeline system.

         Other Systems

         The  Partnership  also owns  three  single-use  pipelines,  located  in
Umatilla, Oregon; Rawlins, Wyoming and Pasco, Washington, each of which supplies
diesel fuel to a railroad fueling facility.  The Oregon and Washington lines are
fully automated,  though the Wyoming line requires minimal start-up  assistance,
which is provided by the railroad.  For the year ended December 31, 1998,  these
three  systems  combined  transported  a total of 3.2 million  barrels of diesel
fuel, representing an aggregate of $1.3 million in revenues.

         Pipelines Products and Activities

         The Pipelines' revenues are based upon volumes and distances of product
shipped.  The  following  table  reflects  the total  volume and barrel miles of
refined  petroleum  products shipped and total operating  revenues earned by the
Pipelines for each of the periods indicated:

<TABLE>
<CAPTION>
                                                              Year Ended December 31,
                                ---------------------------------------------------------------------------------
                                    1998              1997             1996             1995(4)           1994
                                -----------       -----------      -----------       -----------      -----------
<S>                             <C>               <C>              <C>               <C>              <C>   
Volume (1).................          77,965            69,984           73,839            74,965           54,546
Barrel miles (2)...........          17,007            16,144           16,735            16,594           14,460
Revenues (3)...............         $63,421           $61,320          $63,441           $60,192          $46,117

</TABLE>

(1)      Volumes are  expressed  in  thousands  of barrels of refined  petroleum
         product.  
(2)      Barrel miles are shown in millions. A barrel mile is the
         movement  of one  barrel of refined  petroleum  product  one mile.  
(3)      Revenues are expressed in thousands of dollars.
(4)      Amounts  for  1995  and   subsequent   periods  also  include   amounts
         attributable  to the West  Pipeline,  acquired  by the  Partnership  in
         February 1995.

         The following  table sets forth volumes of propane and various types of
other refined petroleum products transported by the Pipelines during each of the
periods indicated:

<TABLE>
<CAPTION>
                                                             Year Ended December 31,
                                                             (Thousands of Barrels)
                              -----------------------------------------------------------------------------------
                                    1998              1997             1996              1995             1994
                              -------------       -----------      -----------       -----------      -----------
<S>                           <C>                 <C>              <C>               <C>              <C>   
Gasoline.................            33,133            32,237           36,063            37,348           23,958
Diesel and fuel oil......            41,087            33,541           32,934            33,411           26,340
Propane..................             3,745             4,206            4,842             4,146            4,204
Other....................              -                 -                -                   60               44
                                -----------       -----------      -----------       -----------      -----------
     Total...............            77,965            69,984           73,839            74,965           54,546
                                ===========       ===========      ===========       ===========      ===========
</TABLE>

         Diesel  and  fuel  oil  are  used  in  farm  machinery  and  equipment,
over-the-road  transportation,   railroad  fueling  and  residential  fuel  oil.
Gasoline is primarily used in over-the-road  transportation  and propane is used
for crop drying,  residential heating and to power irrigation equipment. The mix
of refined petroleum products delivered varies seasonally,  with gasoline demand
peaking in early summer,  diesel fuel demand  peaking in late summer and propane
demand higher in the fall. In addition,  weather  conditions in the areas served
by the East  Pipeline  affect  both the  demand  for and the mix of the  refined
petroleum  products delivered through the East Pipeline,  although  historically
any overall  impact on the total volumes  shipped has been  short-term.  Tariffs
charged to shippers for  transportation of products do not vary according to the
type of product delivered.

         Maintenance and Monitoring

         The  Pipelines  have been  constructed  and are  maintained in a manner
consistent  with  applicable  Federal,  state  and local  laws and  regulations,
standards  prescribed by the American Petroleum  Institute and accepted industry
practice.   Further,  protective  measures  are  taken  and  routine  preventive
maintenance is performed on the Pipelines,  in order to prolong the useful lives
of the Pipelines. Such measures includes cathodic protection to prevent external
corrosion,  inhibitors to prevent internal corrosion and periodic  inspection of
the Pipelines. Additionally, the Pipelines are patrolled at regular intervals to
identify equipment or activities by third parties that, if left unchecked, could
result in  encroachment  upon the  rights-of-way  for the Pipelines and possible
damage to the Pipelines.

         The Partnership uses a  state-of-the-art  Supervisory  Control and Data
Acquisition remote supervisory control software program to continuously  monitor
and control the  Pipelines  from the Wichita,  Kansas  headquarters.  The system
monitors  quantities  of refined  petroleum  products  injected in and delivered
through the Pipelines and  automatically  signals the Wichita  headquarters upon
deviations from normal operations that requires attention.

         Pipeline Operations

         Both the East Pipeline and the West Pipeline are  interstate  pipelines
and thus  subject to Federal  regulation  by such  governmental  agencies as the
Federal Energy Regulatory Commission ("FERC"), the Department of Transportation,
and the  Environmental  Protection  Agency.  Additionally,  the West Pipeline is
subject to state regulation of certain  intrastate rates in Colorado and Wyoming
and  the  East  Pipeline  is  subject  to  state   regulation  in  Kansas.   See
"Regulation."

         Except  for  the  three   single-use   pipelines  and  certain  ethanol
facilities,  all of the  Partnership's  pipeline  operations  constitute  common
carrier  operations and are subject to Federal tariff  regulation.  In May 1998,
KPOP was  authorized by the FERC to adopt  market-based  rates in  approximately
one-half  of its  markets.  Also,  certain  of  its  intrastate  common  carrier
operations are subject to state tariff regulation. Common carrier activities are
those under which transportation through the Pipelines is available at published
tariffs  filed,  in the case of interstate  shipments,  with the FERC, or in the
case of intrastate shipments in Kansas,  Colorado and Wyoming, with the relevant
state authority,  to any shipper of refined petroleum products who requests such
services and satisfies the conditions and specifications for transportation.

         In general,  a shipper on one of the Pipelines delivers products to the
pipeline  from  refineries  or  pipelines  that  connect  to the  pipeline.  The
Pipelines'  operations  also include 20 truck  loading  terminals  through which
refined  petroleum  products are delivered to storage tanks and then loaded into
petroleum  transport trucks.  Tariffs for transportation are charged to shippers
based upon  transportation  from the  origination  point on the  pipeline to the
point of delivery. Such tariffs also include charges for terminaling and storage
of product at the Pipeline's terminals.  Pipelines are generally the lowest cost
method  for  intermediate  and  long-haul  overland  transportation  of  refined
petroleum products.

         Each shipper  transporting  product on a pipeline is required to supply
KPOP with a notice of shipment  indicating sources of products and destinations.
All shipments are tested or receive refinery certifications to ensure compliance
with KPOP's specifications.  Shippers are generally invoiced by KPOP immediately
upon the product entering one of the Pipelines.

          The  following  table  shows the number of tanks owned by KPOP at each
terminal  location  at  December  31, 1998  (except as  indicated),  the storage
capacity in barrels and truck capacity of each terminal location.

 Location of                   Number                 Tankage          Truck
 Terminals                    of Tanks               Capacity       Capacity(a)
--------------------         ----------             ----------      ----------
 Colorado:
  Dupont                         18                  692,000              6
  Fountain                       13                  366,000              5
 Iowa:
  LeMars                          9                  103,000              2
  Milford(b)                     11                  172,000              2
  Rock Rapids                    12                  366,000              2
 Kansas:
  Concordia(c)                    7                   79,000              2
  Hutchinson                      9                  162,000              1
 Nebraska:
  Columbus(d)                    12                  191,000              2
  Geneva                         39                  678,000              8
  Norfolk                        16                  187,000              4
  North Platte                   22                  198,000              5
  Osceola                         8                   79,000              2
 North Dakota:
  Jamestown                      13                  188,000              2
 South Dakota:
  Aberdeen                       12                  181,000              2
  Mitchell                        8                   72,000              2
  Rapid City                     13                  256,000              3
  Sioux Falls                     9                  394,000              2
  Wolsey                         21                  149,000              4
  Yankton                        25                  246,000              4 
 Wyoming:
  Cheyenne                       15                  345,000              2
                              ------              -----------
              Totals            292                5,104,000
                              ======              ===========

(a)      Number of trucks that may be simultaneously loaded.
(b)      This terminal is situated on land leased  through  August 7, 2007 at an
         annual rental of $2,400. KPOP has the right to renew the lease upon its
         expiration for an additional term of 20 years at the same annual rental
         rate.
(c)      This  terminal is  situated on land leased  through the year 2060 for a
         total rental of $2,000.
(d)      Also loads rail tank cars.

         The East Pipeline also has intermediate  storage facilities  consisting
of 13 storage  tanks at El Dorado,  Kansas  and 10 storage  tanks at  McPherson,
Kansas, with aggregate capacities of approximately  388,000 and 534,000 barrels,
respectively.  During 1998,  approximately  55% and 87% of the deliveries of the
East  Pipeline and the West  Pipeline,  respectively,  were made  through  their
terminals,  and the  remainder of the  respective  deliveries of such lines were
made to other pipelines and customer owned storage tanks.

         Storage of product at terminals  pending  delivery is considered by the
Partnership  to be an  integral  part of the  product  delivery  service  of the
Pipelines. Shippers generally store refined petroleum products for less than one
week. Ancillary services,  including injection of shipper-furnished  and generic
additives, are available at each terminal.

          Demand for and Sources of Refined Petroleum Products

         The  Partnership's  pipeline  business depends in large part on (i) the
level of demand for refined  petroleum  products  in the  markets  served by the
Pipelines and (ii) the ability and willingness of refiners and marketers  having
access  to the  Pipelines  to  supply  such  demand by  deliveries  through  the
Pipelines.

         Most of the  refined  petroleum  products  delivered  through  the East
Pipeline  are  ultimately   used  as  fuel  for  railroads  or  in  agricultural
operations,  including fuel for farm equipment,  irrigation systems, trucks used
for transporting crops and crop drying facilities.  Demand for refined petroleum
products for  agricultural  use, and the relative mix of products  required,  is
affected by weather  conditions in the markets served by the East Pipeline.  The
agricultural  sector is also  affected by government  agricultural  policies and
crop prices.  Although periods of drought suppress  agricultural demand for some
refined petroleum products,  particularly those used for fueling farm equipment,
the demand for fuel for irrigation systems often increases during such times.

         While  there is some  agricultural  demand  for the  refined  petroleum
products  delivered  through the West  Pipeline,  as well as  military  jet fuel
volumes, most of the demand is centered in the Denver and Colorado Springs area.
Because demand on the West Pipeline is  significantly  weighted toward urban and
suburban  areas,  the product mix on the West Pipeline  includes a substantially
higher percentage of gasoline than the product mix on the East Pipeline.

         The Pipelines are also dependent upon adequate  levels of production of
refined petroleum products by refineries connected to the Pipelines, directly or
through  connecting  pipelines.  The  refineries  are, in turn,  dependent  upon
adequate  supplies of suitable  grades of crude oil.  The  refineries  connected
directly to the East Pipeline  obtain crude oil from  producing  fields  located
primarily in Kansas,  Oklahoma  and Texas,  and, to a much lesser  extent,  from
other domestic or foreign sources.  Refineries in Kansas, Oklahoma and Texas are
connected to the East Pipeline through other pipelines.  These refineries obtain
their supplies of crude oil from a variety of sources.  The refineries connected
directly to the West  Pipeline are located in Casper and  Cheyenne,  Wyoming and
Denver,  Colorado.  Refineries in Billings and Laurel,  Montana are connected to
the West  Pipeline  through  other  pipelines.  These  refineries  obtain  their
supplies of crude oil primarily  from Rocky mountain  sources.  If operations at
any one refinery were discontinued, the Partnership believes (assuming unchanged
demand for refined  petroleum  products in markets served by the Pipelines) that
the  effects  thereof  would be  short-term  in  nature,  and the  Partnership's
business would not be materially  adversely  affected over the long term because
such  discontinued  production could be replaced by other refineries or by other
sources.

         The majority of the refined petroleum product  transported  through the
East Pipeline in 1998 was produced at three refineries  located at McPherson and
El Dorado, Kansas and Ponca City, Oklahoma, and operated by National Cooperative
Refinery Association ("NCRA"),  Texaco, Inc. and Conoco, Inc. respectively.  The
NCRA and Texaco  refineries  are connected  directly to the East  Pipeline.  The
McPherson,  Kansas refinery operated by NCRA, accounted for approximately 36% of
the total  amount of product  shipped over the East  Pipeline in 1998.  The East
Pipeline  also  has  direct  access  by  third  party  pipelines  to four  other
refineries in Kansas,  Oklahoma and Texas and to Gulf Coast supplies of products
through connecting  pipelines that receive products from a pipeline  originating
on the Gulf  Coast.  Five  connecting  pipelines  can deliver  propane  from gas
processing plants in Texas, New Mexico, Oklahoma and Kansas to the East Pipeline
for shipment.

         The majority of the refined petroleum products  transported through the
West Pipeline is produced at the Frontier refinery located at Cheyenne, Wyoming,
the Ultramar Diamond Shamrock and Conoco refineries located at Denver, Colorado,
and Sinclair's Little America refinery located at Casper,  Wyoming, all of which
are connected  directly to the West Pipeline.  The West Pipeline also has access
to three Billings, Montana, area refineries through a connecting pipeline.

          Principal Customers

         KPOP had a total of  approximately  50 shippers in 1998.  The principal
shippers include four integrated oil companies,  three refining  companies,  two
large farm cooperatives and one railroad.  Transportation  revenues attributable
to the top 10 shippers of the Pipelines  were $48.3  million,  $43.8 million and
$46.5 million,  which  accounted for 76%, 74% and 76% of total revenues  shipped
for each of the years 1998, 1997 and 1996, respectively.

         Competition and Business Considerations

         The East  Pipeline's  major  competitor  is an  independent,  regulated
common  carrier   pipeline  system  owned  by  The  Williams   Companies,   Inc.
("Williams")  that operates  approximately 100 miles east of and parallel to the
East Pipeline. The Williams system is a substantially more extensive system than
the East Pipeline.  Furthermore,  Williams and its  affiliates  have capital and
financial   resources  that  are   substantially   greater  than  those  of  the
Partnership.  Competition  with  Williams is based  primarily on  transportation
charges,  quality of  customer  service  and  proximity  to end users,  although
refined product pricing at either the origin or terminal point on a pipeline may
outweigh  transportation  costs.  Fifteen  of the East  Pipeline's  16  delivery
terminals are located within 2 to 145 miles of, and in direct  competition  with
Williams' terminals.

         The West Pipeline competes with the truck loading racks of the Cheyenne
and Denver refineries and the Denver terminals of the Chase Pipeline Company and
Phillips Petroleum pipelines.  Diamond Shamrock terminals in Denver and Colorado
Springs,  connected to a Diamond  Shamrock  pipeline from their Texas  Panhandle
refinery,  are major  competitors  to the West  Pipeline's  Denver and  Fountain
terminals, respectively.

         Because pipelines are generally the lowest cost method for intermediate
and  long-haul  movement of refined  petroleum  products,  the  Pipelines'  more
significant  competitors are common carrier and proprietary  pipelines owned and
operated by major  integrated  and large  independent  oil  companies  and other
companies in the areas where the Pipelines deliver products. Competition between
common carrier pipelines is based primarily on transportation  charges,  quality
of customer  service and proximity to end users.  The Partnership  believes high
capital costs, tariff regulation,  environmental  considerations and problems in
acquiring  rights-of-way  make it unlikely that other competing pipeline systems
comparable in size and scope to the Pipelines  will be built in the near future,
provided the Pipelines have available capacity to satisfy demand and its tariffs
remain at reasonable levels.

         The costs associated with transporting products from a loading terminal
to end  users  limit  the  geographic  size of the  market  that  can be  served
economically  by any  terminal.  Transportation  to end users  from the  loading
terminals of the Partnership is conducted  principally by trucking operations of
unrelated third parties.  Trucks may  competitively  deliver products in some of
the areas served by the Pipelines.  However,  trucking costs render that mode of
transportation  not  competitive  for  longer  hauls  or  larger  volumes.   The
Partnership does not believe that trucks are, or will be, effective  competition
to its long-haul volumes over the long term.


Liquids Terminaling

         Introduction

         The Partnership's  Support Terminal Services operation ("ST") is one of
the largest  independent  petroleum  products and specialty liquids  terminaling
companies  in the United  States.  For the year ended  December  31,  1998,  the
Partnership's  terminaling  business  accounted  for  approximately  50%  of the
Partnership's revenues. As of December 31, 1998, ST operated 33 facilities in 18
states  and  the  District  of  Columbia,  with  a  total  storage  capacity  of
approximately  22.2  million  barrels.  In  January  1999,  ST  made  its  first
international  acquisition,  with the purchase of six  terminals  located in the
United  Kingdom,  having a total capacity of  approximately  5.5 million barrels
(see:  "Recent  Development").   ST  and  its  predecessors  have  been  in  the
terminaling business for over 40 years and handle a wide variety of liquids from
petroleum products to specialty chemicals to edible liquids.

         ST's terminal  facilities  provide storage on a fee basis for petroleum
products,  specialty  chemicals  and other  liquids.  ST's six largest  domestic
terminal  facilities are located in Piney Point,  Maryland;  Linden,  New Jersey
(50% owned joint venture); Jacksonville,  Florida; Texas City, Texas; Baltimore,
Maryland; and, Westwego,  Louisiana.  Excluding the Linden, New Jersey facility,
which was acquired by ST in November 1998 (see: "Description of Largest Terminal
Facilities"),  these  facilities  accounted  for  approximately  67.6%  of  ST's
revenues and 64.8% of its tankage capacity in 1998.

         Description of Largest Terminal Facilities

         Piney Point,  Maryland.  The largest terminal  currently owned by ST is
located on  approximately  400 acres on the  Potomac  River.  The  facility  was
acquired as part of the  purchase of the liquids  terminaling  assets of Steuart
Petroleum  Company and certain of its  affiliates  (collectively  "Steuart")  in
December 1995. The Piney Point terminal has approximately 5.4 million barrels of
storage  capacity  in 28  tanks  and is  the  closest  deep  water  facility  to
Washington,  D.C. This terminal competes with other large petroleum terminals in
the East Coast  water-borne  market  extending  from New York Harbor to Norfolk,
Virginia. The terminal currently stores petroleum products, consisting primarily
of fuel oils, asphalt and caustic soda solution.  The terminal has a dock with a
36-foot draft for tankers and four berths for barges.  It also has truck loading
facilities,  product blending  capabilities and is connected to a pipeline which
supplies residual fuel oil to two power generating stations.

         Linden,  New Jersey.  In October  1998, ST entered into a joint venture
relationship  with Northville  Industries  Corp.  ("Northville")  to acquire the
management of and a 50% ownership  interest in the terminal  facility at Linden,
New  Jersey  that was  previously  owned  by  Northville.  The 44 acre  facility
provides  ST with  deep-water  terminaling  capabilities  at New York Harbor and
primarily stores petroleum products, including gasoline, jet fuel and fuel oils.
The facility has a total  capacity of  approximately  3.9 million  barrels in 22
tanks, can receive products via ship, barge and pipeline and delivers product by
ship, barge, pipeline and truck. The terminal has two docks (and leases a third)
with draft limits of 35 and 24 feet, respectively.

         Jacksonville, Florida. The Jacksonville terminal, also acquired as part
of the  Steuart  transaction,  is located on  approximately  86 acres on the St.
John's  River and  consists of a main  terminal  and two annexes  with  combined
storage capacity of approximately  2.1 million barrels in 30 tanks. The terminal
is currently used to store petroleum products including gasoline, No. 2 oil, No.
6 oil,  diesel and  kerosene.  This  terminal  has a tanker berth with a 38-foot
draft  and  four  barge  berths  and also  offers  truck  and  rail car  loading
facilities and facilities to blend residual fuels for ship bunkering.

         Texas City,  Texas.  The Texas City facility is situated on 39 acres of
land  leased  from the  Texas  City  Terminal  Railway  Company  ("TCTRC")  with
long-term  renewal  options.  Located  on  Galveston  Bay near the  mouth of the
Houston Ship Channel,  approximately  sixteen  miles from open water,  the Texas
City terminal  consists of 124 tanks with a total  capacity of  approximately  2
million  barrels.  The  eastern  end of the Texas City site is adjacent to three
deep-water  docking  facilities,  which  are also  owned  by  TCTRC.  The  three
deep-water  docks include two 36-foot draft docks and a 40-foot draft dock.  The
docking  facilities can  accommodate any ship or barge capable of navigating the
40-foot  draft of the Houston Ship Channel.  ST is charged  dockage and wharfage
fees on a per vessel and per unit basis, respectively, by TCTRC, which it passes
on to its customers.

         The Texas City facility is designed to  accommodate  a diverse  product
mix,  including  specialty  chemicals,  such as  petrochemicals  and  has  tanks
equipped for the specific storage needs of the various products handled;  piping
and  pumping  equipment  for  moving  the  product  between  the  tanks  and the
transportation modes; and, an extensive  infrastructure of support equipment. ST
receives or delivers the majority of the specialty chemicals that it handles via
ship or barge at Texas City. ST also receives and delivers liquids via rail tank
cars and transport  trucks and has direct pipeline  connections to refineries in
Texas City.

         ST's facility has been designed with engineered  structural measures to
minimize the  possibility of the occurrence and the level of damage in the event
of a spill or fire.  All  loading  areas,  tanks,  pipes and  pumping  areas are
"contained" to collect any spillage and insure that only properly  treated water
is discharged from the site.

         Baltimore,  Maryland. The Baltimore facility is situated on 18 acres of
owned  land,  located  just south of  Baltimore  near the  Harbor  Tunnel on the
Chesapeake Bay. ST also owns a 700-foot finger pier with a 33-foot draft channel
and berth at the facility.  The dock gives ST the ability to receive and deliver
shipments of product from and to barge and ship. Additionally,  the terminal can
receive  products by  pipeline,  truck and rail and  deliver  them via truck and
rail.  Similar to the Texas City  facility,  Baltimore  is a  specialty  liquids
terminal. The primary products stored at the Baltimore facility include asphalt,
fructose,  caustic solutions,  military jet fuel, latex and other chemicals. The
Baltimore  tank  facility  consists  of  49  tanks  with  a  total  capacity  of
approximately  821,000  barrels.  All of the  utilized  tanks are  dedicated  to
specific  products  of  customers  under  contract.  The tanks are  specifically
equipped to handle the requirements of the products they store.

         Westwego,  Louisiana.  The Westwego facility is situated on 27 acres of
owned land on the west bank of the  Mississippi  River  across from New Orleans.
Its dock is capable of handling ocean-going vessels and barges. The terminal has
multiple  facilities for receiving and shipping by rail and tank truck,  as well
as vessels and barges.  The facility  consists of 54 tanks with a total capacity
of approximately  858,000  barrels.  The facility also includes a blending plant
for the formulation of certain molasses-based feeds which has additional smaller
tanks for blending and  formulation of the liquid feeds.  The Westwego  terminal
historically has been primarily a terminal for molasses and animal and vegetable
fats and oils.  In recent  years,  the terminal has broadened its product mix to
include fertilizer, herbicides, latex and caustic solutions.

         Other Terminal Sites. In addition to the six major facilities described
above, ST has 27 other terminal facilities located throughout the United States,
and, as a result of a January 1999  transaction,  six  facilities  in the United
Kingdom.  Two  domestic  facilities,   located  in  Blue  Island,  Illinois  and
Vancouver,  Washington, were acquired during 1998. ST also expanded the capacity
of its Stockton, California facility through two additional transactions, one of
which involved the  disposition of a ST terminal  facility  located in Imperial,
California.  During 1998,  ST also  elected not to proceed  with its  previously
announced  purchase,  from Stolthaven  Chicago,  Inc. of a Chicago area terminal
facility.  The 27  facilities  represented  approximately  35.2%  of ST's  total
tankage capacity and approximately 32.4% of its total revenue for 1998. With the
exception  of the  facilities  in  Columbus,  Georgia,  which  handles  aviation
gasoline and specialty  chemicals;  Winona,  Minnesota,  which handles  nitrogen
fertilizer  solutions;  Savannah,  Georgia,  which handles chemicals and caustic
solutions;  and,  Vancouver,   Washington,  which  handles  chemicals  and  bulk
fertilizer, these facilities primarily store petroleum products for a variety of
customers.  These facilities  provide ST with a  geographically  diverse base of
customers and revenue.

         Recent Development.  In January 1999, ST acquired six terminals located
in the United  Kingdom  from GATX  Terminals  Limited  for  (pound)22.6  million
(approximately  $37.4 million) plus the assumption of certain  liabilities.  The
terminals have an aggregate  capacity of 5.5 million  barrels in 307 tanks,  are
served  by deep  water  marine  docks  and  handle a wide  variety  of  liquids,
including petroleum products,  chemicals (including fats and vegetable oils) and
molten sulfur. The transaction,  the first international  acquisition by ST, was
financed by bank borrowings.  Three of the terminals are located in England, two
in Scotland and one in Northern Ireland.



<PAGE>


         The following table outlines ST's terminal locations, capacities, tanks
and primary products handled:
<TABLE>
<CAPTION>
                                    Tankage            No. of              Primary Products
   Facility                         Capacity            Tanks                   Handled
  ---------------------------      ----------         ---------   ---------------------------------
  <S>                               <C>                <C>           <C> 
  Primary Terminals:
  Piney Point, MD                   5,403,000            28          Petroleum
  Linden, NJ(a)                     3,884,000            22          Petroleum
  Jacksonville, FL                  2,066,000            30          Petroleum
  Texas City, TX                    2,002,000           124          Chemicals and Petrochemicals
  Westwego, LA                        858,000            54          Molasses, Fertilizer, Caustic
  Baltimore, MD                       821,000            49          Chemicals, Asphalt, Jet Fuel

  Other Terminals:
  Montgomery, AL(b)                   162,000             7          Petroleum, Jet Fuel
  Moundville, AL                      310,000             6          Jet Fuel
  Tuscon, AZ(b)                       181,000             7          Petroleum
  Stockton, CA                        551,000            25          Petroleum
  Farragut St., DC                    176,000             5          Petroleum
  M Street, DC                        133,000             3          Petroleum
  Homestead, FL(b)                     72,000             2          Jet Fuel
  Augusta, GA                         110,000             8          Petroleum
  Bremen, GA                          180,000             8          Petroleum, Jet Fuel
  Brunswick, GA                       302,000             3          Petroleum, Pulp Liquor
  Columbus, GA                        180,000            25          Petroleum, Chemicals
  Macon, GA(b)                        307,000            10          Petroleum, Jet Fuel
  Savannah, GA                        861,000            19          Petroleum, Chemicals
  Blue Island, IL                     752,000            19          Petroleum
  Chillicothe, IL                     270,000             6          Petroleum
  Peru, IL                            221,000             8          Petroleum, Fertilizer
  Indianapolis, IN                    410,000            18          Petroleum
  Salina, KS                           98,000            10          Petroleum
  Andrews AFB Pipeline, MD             72,000             3          Jet Fuel
  Winona, MN                          229,000             7          Fertilizer
  Alamogordo, NM(b)                   120,000             5          Jet Fuel
  Drumright, OK                       315,000             4          Jet Fuel
  San Antonio, TX                     207,000             4          Jet Fuel
  Cockpit Point, VA                   554,000            16          Petroleum, Asphalt
  Virginia Beach, VA(b)                40,000             2          Jet Fuel
  Vancouver, WA                        94,000            31          Chemicals, Fertilizer
  Milwaukee, WI                       308,000             7          Petroleum
  Grays, England                    1,950,000            53          Petroleum
  Eastham, England                  2,250,000           162          Chemicals, Animal Fats
  Runcorn, England                    145,000             4          Molten sulphur
  Glasgow, Scotland                   344,000            16          Petroleum
  Leith, Scotland                     458,000            34          Petroleum
  Belfast, Northern Ireland           315,000            38          Petroleum
                              ---------------       -------
                                   27,711,000           882
                              ===============       =======
</TABLE>

  (a)  The terminal is 50% owned by ST.
  (b)  Facility  also  includes  pipelines  to  U.S.  government  military  base
       locations.


         Customers

         The  storage  and  transport  of jet fuel for the  U.S.  Department  of
Defense is an important part of ST's business. Eleven of ST's terminal sites are
involved in the  terminaling  or  transport  (via  pipeline) of jet fuel for the
Department  of Defense  and seven of the  eleven  locations  have been  utilized
solely by the U.S.  Government.  Two of these  locations are  presently  without
government  business.  Of the eleven  locations,  six  include  pipelines  which
deliver jet fuel  directly to nearby  military  bases,  while  another  location
supplies  Andrews Air Force Base,  Maryland  and  consists of a barge  receiving
dock, an 11.3 mile pipeline,  three 24,000 barrel  double-bottomed  tanks and an
administration  building  located on the base. This facility  provides the barge
receipt,  pipeline  transportation  and  terminaling  services  for jet  fuel to
Andrews Air Force Base on a tariff basis for the Defense Fuel Supply  Center and
has served the base for the past 30 years.

          Competition and Business Considerations

         In addition to the terminals owned by independent  terminal  operators,
such as ST, many major  energy and chemical  companies  own  extensive  terminal
storage facilities.  Although such terminals often have the same capabilities as
terminals  owned  by  independent  operators,  they  generally  do  not  provide
terminaling  services to third  parties.  In many  instances,  major  energy and
chemical  companies  that  own  storage  and  terminaling  facilities  are  also
significant  customers  of  independent  terminal  operators,  such as ST.  Such
companies  typically  have  strong  demand for  terminals  owned by  independent
operators when independent terminals have more cost effective locations near key
transportation  links,  such as  deep-water  ports.  Major  energy and  chemical
companies  also need  independent  terminal  storage  when their  owned  storage
facilities are inadequate, either because of size constraints, the nature of the
stored material or specialized handling requirements.

         Independent  terminal  owners  generally  compete  on the  basis of the
location and  versatility of terminals,  service and price. A favorably  located
terminal will have access to various cost effective transportation modes both to
and  from  the  terminal.   Possible  transportation  modes  include  waterways,
railroads,  roadways  and  pipelines.  Terminals  located near  deep-water  port
facilities are referred to as "deep-water  terminals" and terminals without such
facilities are referred to as "inland terminals";  though some inland facilities
are served by barges on navigable rivers.

         Terminal  versatility is a function of the operator's  ability to offer
handling for diverse  products with complex handling  requirements.  The service
function typically  provided by the terminal  includes,  among other things, the
safe  storage  of the  product  at  specified  temperature,  moisture  and other
conditions,  as well as receipt at and delivery from the terminal,  all of which
must be in compliance  with  applicable  environmental  regulations.  A terminal
operator's  ability  to obtain  attractive  pricing  is often  dependent  on the
quality,  versatility  and reputation of the  facilities  owned by the operator.
Although many products  require modest terminal  modification,  operators with a
greater  diversity of terminals with versatile  storage  capabilities  typically
require less modification prior to usage,  ultimately making the storage cost to
the customer more attractive.

         Several   companies   offering  liquid   terminaling   facilities  have
significantly  more  capacity  than ST.  However,  much of ST's  tankage  can be
described as "niche" facilities that are equipped to properly handle "specialty"
liquids or provide  facilities or services where management  believes they enjoy
an advantage  over  competitors.  Most of the larger  operators,  including GATX
Terminals  Corporation,  Williams,  and Petroleum Fuel & Terminal Company,  have
facilities used primarily for petroleum related products.  As a result,  many of
ST's terminals compete against other large petroleum products terminals,  rather
than specialty  liquids  facilities.  Such specialty or "niche"  tankage is less
abundant in the U.S. and "specialty"  liquids  typically command higher terminal
fees than lower-price bulk terminaling for petroleum products.


Capital Expenditures

         Capital  expenditures by the Pipelines,  excluding  acquisitions,  were
$5.0  million,   $4.5  million  and  $3.4  million  for  1998,  1997  and  1996,
respectively.  During these periods,  adequate capacity existed on the Pipelines
to accommodate volume growth and the expenditures required for environmental and
safety improvements were not material in amount. Capital expenditures, excluding
acquisitions,  by ST were $4.4 million, $6.1 million and $3.6 million, for 1998,
1997 and 1996, respectively.

         Capital  expenditures of the Partnership during 1999 are expected to be
approximately  $12 million to $16  million.  See  "Management's  Discussion  and
Analysis of  Financial  Condition  and  Results of  Operations  - Liquidity  and
Capital  Resources."  Additional  expansion-related  capital  expenditures  will
depend on future  opportunities  to expand  the  Partnership's  operations.  The
General  Partner  intends  to  finance  future  expansion  capital  expenditures
primarily through Partnership  borrowings.  Such future  expenditures,  however,
will depend on many factors beyond the Partnership's control, including, without
limitation,  demand for refined petroleum  products and terminaling  services in
the  Partnership's   market  areas,   local,  state  and  Federal   governmental
regulations,  fuel  conservation  efforts and the  availability  of financing on
acceptable  terms. No assurance can be given that required capital  expenditures
will not exceed  anticipated  amounts  during the year or thereafter or that the
Partnership  will  have  the  ability  to  finance  such  expenditures   through
borrowings or choose to do so.

Regulation

         Interstate   Regulation.   The  interstate   common  carrier   pipeline
operations of the  Partnership  are subject to rate regulation by FERC under the
Interstate  Commerce  Act. The  Interstate  Commerce Act  provides,  among other
things,  that to be lawful the rates of common carrier petroleum  pipelines must
be "just and  reasonable" and not unduly  discriminatory.  New and changed rates
must be filed with the FERC,  which may investigate  their lawfulness on protest
or its own motion.  The FERC may suspend the  effectiveness of such rates for up
to  seven  months.   If  the  suspension   expires  before   completion  of  the
investigation,  the rates go into  effect,  but the  pipeline can be required to
refund to shippers,  with interest,  any  difference  between the level the FERC
determines to be lawful and the filed rates under investigation. Rates that have
become final and  effective  may be  challenged  by complaint to FERC filed by a
shipper or on the FERC's own initiative and  reparations may be recovered by the
party filing the  complaint for the two year period prior to the  complaint,  if
FERC finds the rate to be unlawful.

         The FERC allows for a rate of return for petroleum  products  pipelines
determined  by adding (i) the  product of a rate of return  equal to the nominal
cost of debt  multiplied  by the  portion  of the rate base that is deemed to be
financed  with debt and (ii) the  product of a rate of return  equal to the real
(i.e., inflation-free) cost of equity multiplied by the portion of the rate base
that is deemed to be financed with equity.  The appropriate rate of return for a
petroleum  pipeline is determined on a case-by-case  basis,  taking into account
cost of capital, competitive factors and business and financial risks associated
with pipeline operations.

         Under  Title  XVIII of the  Energy  Policy  Act of 1992 (the "EP Act"),
rates  that were in effect  on  October  24,  1991  that were not  subject  to a
protest,  investigation or complaint are deemed to be just and reasonable.  Such
rates are subject to  challenge  only for limited  reasons.  Any relief  granted
pursuant to such challenges may be prospective  only.  Because the Partnership's
rates that were in effect on October 24, 1991, were subject to investigation and
protest  at that  time,  its rates  were not  deemed  to be just and  reasonable
pursuant  to the EP Act.  The  Partnership's  current  rates  became  final  and
effective  in April  1994,  and the  Partnership  believes  that  its  currently
effective  tariffs are just and reasonable and would  withstand  challenge under
the FERC's cost-based rate standards.  Because of the complexity of rate making,
however, the lawfulness of any rate is never assured.

         On October  22,  1993,  the FERC issued  Order No. 561 which  adopted a
simplified  rate making  methodology for future oil pipeline rate changes in the
form of  indexation.  Indexation,  which is also known as price cap  regulation,
establishes  ceiling  prices on oil  pipeline  rates based on  application  of a
broad-based  measure of inflation in the general economy to existing rates. Rate
increases up to the ceiling level are to be discretionary for the pipeline, and,
for  such  rate  increases,  there  will be no need to file  cost-of-service  or
supporting data.  Moreover,  so long as the ceiling is not exceeded,  a pipeline
may make a limitless  number of rate change  filings.  This  indexing  mechanism
calculates a ceiling rate. Rate decreases are required if the indexing mechanism
operates to reduce the  ceiling  rate below a  pipeline's  existing  rates.  The
pipeline may increase its rates to this calculated ceiling rate without filing a
formal cost based justification and with limited risk of shipper protests.

         The  indexation  method  is to serve  as the  principal  basis  for the
establishment  of oil  pipeline  rate changes in the future.  However,  the FERC
determined  that a pipeline  may  utilize any one of the  following  alternative
methodologies to indexing: (i) a cost-of-service  methodology may be utilized by
a pipeline to justify a change in a rate if a pipeline can demonstrate  that its
increased  costs  are  prudently  incurred  and  that  there  is  a  substantial
divergence  between such increased  costs and the rate that would be produced by
application  of the  index;  and  (ii) a  pipeline  may base  its  rates  upon a
"light-handed"  market-based  form of regulation if it is able to  demonstrate a
lack of significant market power in the relevant markets.

         On September 15, 1997, the Partnership  filed an Application for Market
Power  Determination  with the FERC seeking market based rates for approximately
half of its markets. In May 1998, the FERC granted the Partnership's application
and approximately half of the pipelines markets  subsequently  became subject to
market force regulation.

         In the  FERC's  Lakehead  decision  issued  June  15,  1995,  the  FERC
partially  disallowed  Lakehead's  inclusion  of  income  taxes  in its  cost of
service.  Specifically,  the FERC held that  Lakehead was entitled to receive an
income tax  allowance  with  respect  to income  attributable  to its  corporate
partners,  but  was  not  entitled  to  receive  such an  allowance  for  income
attributable to the Partnership interests held by individuals. Lakehead's motion
for rehearing  was denied by the FERC and Lakehead  appealed the decision to the
U.S.  Court of Appeals.  Subsequently,  the case was settled by Lakehead and the
appeal was  withdrawn.  In another  FERC  proceeding  involving a different  oil
pipeline  limited  partnership,  various  shippers  challenged  such  pipeline's
inclusion of an income tax allowance in its cost of service. The FERC Staff also
supported the  disallowance of income taxes. The FERC recently decided this case
on the same basis as the Lakehead  case. If the FERC were to disallow the income
tax  allowance in the cost of service of the Pipelines on the basis set forth in
the Lakehead order, the General Partner believes that the Partnership's  ability
to pay distributions to the holders of the Units would not be impaired; however,
in view of the uncertainties  involved in this issue,  there can be no assurance
in this regard.

         Intrastate  Regulation.  The intrastate operations of the East Pipeline
in Kansas are subject to regulation by the Kansas  Corporation  Commission,  and
the  intrastate  operations  of the West  Pipeline in  Colorado  and Wyoming are
subject to regulation by the Colorado Public Utility  Commission and the Wyoming
Public Service  Commission,  respectively.  Like the FERC, the state  regulatory
authorities  require  that  shippers be notified of proposed  intrastate  tariff
increases and have an  opportunity  to protest such  increases.  KPOP also files
with such state  authorities  copies of interstate tariff changes filed with the
FERC.  In  addition  to  challenges  to new or  proposed  rates,  challenges  to
intrastate  rates that have already become  effective are permitted by complaint
of an interested person or by independent  action of the appropriate  regulatory
authority.


Environmental Matters

         General.  The  operations  of the  Partnership  are subject to Federal,
state  and  local  laws  and  regulations  relating  to  the  protection  of the
environment in the United States and,  since  February  1999, the  environmental
laws and  regulations of the United Kingdom in regard to the terminals  acquired
from GATX Terminals,  Limited, in the United Kingdom. See "Liquids Terminaling -
Recent  Development."  Although the Partnership believes that its operations are
in  general  compliance  with  applicable  environmental  regulations,  risks of
substantial  costs  and  liabilities  are  inherent  in  pipeline  and  terminal
operations, and there can be no assurance that significant costs and liabilities
will not be incurred by the  Partnership.  Moreover,  it is possible  that other
developments,  such as increasingly strict  environmental laws,  regulations and
enforcement policies  thereunder,  and claims for damages to property or persons
resulting from the operations of the Partnership, past and present, could result
in substantial costs and liabilities to the Partnership.

         Water.  The Oil  Pollution  Act  ("OPA") was enacted in 1990 and amends
provisions of the Federal Water Pollution Control Act of 1972 and other statutes
as they  pertain to  prevention  and  response to oil spills.  The OPA  subjects
owners of facilities to strict,  joint and potentially  unlimited  liability for
removal costs and certain other  consequences of an oil spill,  where such spill
is into navigable waters, along shorelines or in the exclusive economic zone. In
the event of an oil spill into such  waters,  substantial  liabilities  could be
imposed  upon  the  Partnership.  Regulations  concerning  the  environment  are
continually  being  developed  and  revised in ways that may  impose  additional
regulatory burdens on the Partnership.

         Contamination  resulting  from spills or releases of refined  petroleum
products  are not  unusual  within the  petroleum  pipeline  industry.  The East
Pipeline has  experienced  limited  groundwater  contamination  at five terminal
sites (Milford, Iowa; Norfolk and Columbus,  Nebraska; and Aberdeen and Yankton,
South Dakota)  resulting from spills of refined petroleum  products.  Regulatory
authorities  have been notified of these findings and  remediation  projects are
underway  or  under  construction  using  various  remediation  techniques.  The
Partnership  estimates that $1,260,000 has been expended to date for remediation
at these five sites and that ongoing remediation  expenses at each site will not
have a material effect on the East Pipeline.  Groundwater  contamination is also
known to exist at East Pipeline sites in Augusta,  Kansas and in Potwin, Kansas,
but no  remediation  has been  required.  Although no assurances can be made, if
remediation is required,  the Partnership believes that the resulting cost would
not be material.

         Groundwater  remediation  efforts  are  ongoing at all four of the West
Pipeline's  terminals and at a Wyoming pump station.  Regulatory  officials have
been consulted in the  development of remediation  plans. In connection with the
purchase of the West  Pipeline,  KPOP agreed to implement  remediation  plans at
these specific sites over the succeeding five years following the acquisition in
return for the payment by the seller,  Wyco Pipe Line Company,  of $1,312,000 to
KPOP to cover the discounted  estimated future costs of these  remediations.  In
conjunction with the acquisition, the Partnership accrued $1.8 million for these
future remediation expenses.

         In May 1998, the West Pipeline, at a point between Dupont, Colorado and
Fountain,  Colorado  failed,  and  approximately  1,000  barrels of product  was
released.  Containment  and  remedial  action was  immediately  commenced.  Upon
investigation,  it appeared  that the failure of the  pipeline was due to damage
caused by third party  excavations.  The Partnership has made claim to the third
party as well as to its insurance  carriers.  The Partnership has entered into a
Compliance  Order on  Consent  with the State of  Colorado  with  respect to the
remediation.  As of December 31, 1998, the Partnership has incurred $1.1 million
of costs in connection  with this incident.  Future costs are not anticipated to
be significant,  and the Partnership expects to recover substantially all of its
costs from either the third party or its insurance carrier.

         ST has experienced  groundwater  contamination at its terminal sites at
Baltimore,  Maryland,  and Alamogordo,  New Mexico.  Regulatory authorities have
been notified of these findings and cleanup is underway using  extraction  wells
and air strippers. Groundwater contamination also exists at the ST terminal site
in Stockton,  California and in the areas  surrounding  this site as a result of
the past  operations  of five of the  facilities  operating in this area. ST has
entered  into an  agreement  with three of these  other  companies  to  allocate
responsibility  for the clean up of the  contaminated  area.  Under the  current
approach, clean up will not be required,  however based on risk assessment,  the
site will continue to be monitored and tested.  In addition,  ST is  responsible
for  up  to  two-thirds  of  the  costs  associated  with  existing  groundwater
contamination  at a formerly  owned terminal at Marcy,  New York,  which also is
being remediated through extraction wells and air strippers. The Partnership has
expended approximately $878,000 through 1998 for remediation at these four sites
and estimates that on-going  remediation  expenses will aggregate  approximately
$200,000 to $300,000 over the next three years.

         Groundwater  contamination  has been identified at ST terminal sites at
Montgomery,  Alabama and  Milwaukee,  Wisconsin,  but no  remediation  has taken
place.  Shell  Oil  Company  has  indemnified  ST for any  contamination  at the
Milwaukee site prior to ST's acquisition of the facility. Star Enterprises,  the
former owner of the Montgomery terminal, has indemnified ST for contamination at
a portion of the Montgomery  site where  contamination  was identified  prior to
ST's  acquisition of the facility.  A remediation  system is in place to address
groundwater  contamination at the ST terminal facility in Augusta, Georgia. Star
Enterprises,  the former owner of the Augusta  terminal,  has indemnified ST for
this contamination and has retained  responsibility for the remediation  system.
There is also a possibility  that groundwater  contamination  may exist at other
facilities.  Although no assurance in this regard can be given,  the Partnership
believes that such contamination,  if present, could be remedied with extraction
wells and air  strippers  similar  to those that are  currently  in use and that
resulting costs would not be material.

         In 1991, the Environmental  Protection  Agency (the "EPA")  implemented
regulations   expanding  the  definition  of  hazardous   waste.   The  Toxicity
Characteristic  Leaching  Procedure  ("TCLP") has  broadened  the  definition of
hazardous waste by including 25 constituents  that were not previously  included
in  determining  that a waste is  hazardous.  Water that  comes in contact  with
petroleum may fail the TCLP procedure and require additional  treatment prior to
its  disposal.   The  Partnership  has  installed  totally  enclosed  wastewater
treatment  systems at all East Pipeline  terminal  sites to treat such petroleum
contaminated water, especially tank bottom water.

         The  EPA  has  also  promulgated   regulations  that  may  require  the
Partnership  to apply for permits to discharge  storm water runoff.  Storm water
discharge  permits  also  may  be  required  in  certain  states  in  which  the
Partnership  operates.  Where such requirements are applicable,  the Partnership
has applied for such  permits  and,  after the  permits  are  received,  will be
required to sample storm water  effluent  before  releasing it. The  Partnership
believes  that  effluent  limitations  could be met,  if  necessary,  with minor
modifications  to existing  facilities and operations.  Although no assurance in
this regard can be given,  the  Partnership  believes  that the changes will not
have a material effect on the  Partnership's  financial  condition or results of
operations.

         Groundwater  contamination  has been  experienced  at ST's Piney Point,
Maryland,  Jacksonville,  Florida and each of the Washington,  D.C.  facilities.
Foreseeable remediation expenses are estimated not to exceed $1.6 million.

         Aboveground  Storage  Tank  Acts.  A number of the  states in which the
Partnership  operates  in the United  States  have  passed  statutes  regulating
aboveground  tanks  containing  liquid  substances.  Generally,  these  statutes
require  that such  tanks  include  secondary  containment  systems  or that the
operators take certain  alternative  precautions to ensure that no contamination
results from any leaks or spills from the tanks. Although there is not currently
a Federal statute  regulating  these above ground tanks,  there is a possibility
that such a law will be passed in the United  States  within the next  couple of
years.  The  Partnership  is in  substantial  compliance  with all above  ground
storage  tank laws in the states with such laws.  Although no  assurance  can be
given, the Partnership  believes that the future  implementation of above ground
storage tank laws by either additional states or by the Federal  government will
not have a material adverse effect on the Partnership's  financial  condition or
results of operations.

         Air  Emissions.  The operations of the  Partnership  are subject to the
Federal Clean Air Act and comparable  state and local statutes.  The Partnership
believes that the operations of the Pipelines are in substantial compliance with
such statutes in all states in which they operate.

         Amendments to the Federal Clean Air Act enacted in 1990 require or will
require most industrial  operations in the United States to incur future capital
expenditures in order to meet the air emission control  standards that have been
and are to be  developed  and  implemented  by the EPA and  state  environmental
agencies.  Pursuant  to  these  Clean  Air  Act  Amendments,  those  Partnership
facilities that emit volatile organic  compounds  ("VOC") or nitrogen oxides are
subject to  increasingly  stringent  regulations,  including  requirements  that
certain sources install maximum or reasonably  available control technology.  In
addition,  the 1999 Federal  Clean Air Act  Amendments  include a new  operating
permit  for major  sources  ("Title V  Permits"),  which  applies to some of the
Partnership's facilities. Additionally, new dockside loading facilities owned or
operated  by the  Partnership  in the United  States  will be subject to the New
Source  Performance  Standards that were proposed in May 1994. These regulations
will control VOC emissions from the loading and unloading of tank vessels.

         Although the  Partnership is in substantial  compliance with applicable
air  pollution  laws,  in  anticipation  of the  implementation  of stricter air
control  regulations,  the Partnership is taking actions to substantially reduce
its air  emissions.  The  Partnership  plans to install bottom loading and vapor
recovery  equipment on the loading  racks at selected  terminal  sites along the
East Pipeline that do not already have such emissions control  equipment.  These
modifications  will  substantially  reduce the total air emissions  from each of
these  facilities.  Having begun in 1993, this project is being phased in over a
period of years.

         Solid Waste. The Partnership  generates  non-hazardous solid waste that
is subject to the requirements of the Federal Resource Conservation and Recovery
Act ("RCRA") and  comparable  state  statutes in the United  States.  The EPA is
considering  the  adoption  of stricter  disposal  standards  for  non-hazardous
wastes.  RCRA also  governs the disposal of hazardous  wastes.  At present,  the
Partnership  is not  required to comply with a  substantial  portion of the RCRA
requirements because the Partnership's operations generate minimal quantities of
hazardous wastes. However, it is anticipated that additional wastes, which could
include wastes  currently  generated  during  pipeline  operations,  will in the
future be designated as "hazardous wastes". Hazardous wastes are subject to more
rigorous and costly disposal  requirements than are non-hazardous  wastes.  Such
changes in the  regulations  may result in additional  capital  expenditures  or
operating expenses by the Partnership.

         At the terminal sites at which  groundwater  contamination  is present,
there is also  limited  soil  contamination  as a result  of the  aforementioned
spills.  The  Partnership  is under no  present  requirements  to  remove  these
contaminated  soils, but the Partnership may be required to do so in the future.
Soil contamination also may be present at other Partnership  facilities at which
spills or releases have occurred.  Under certain circumstances,  the Partnership
may be required to clean up such contaminated soils. Although these costs should
not have a material adverse effect on the Partnership, no assurance can be given
in this regard.

         Superfund. The Comprehensive  Environmental Response,  Compensation and
Liability Act ("CERCLA" or  "Superfund")  imposes  liability,  without regard to
fault or the  legality of the original  act, on certain  classes of persons that
contributed  to the release of a  "hazardous  substance"  into the  environment.
These  persons  include  the owner or operator  of the site and  companies  that
disposed or arranged for the disposal of the hazardous  substances  found at the
site.  CERCLA also authorizes the EPA and, in some  instances,  third parties to
act in response to threats to the public health or the  environment  and to seek
to recover from the responsible  classes of persons the costs they incur. In the
course of its ordinary  operations,  the Partnership may generate waste that may
fall within CERCLA's definition of a "hazardous substance".  The Partnership may
be  responsible  under CERCLA for all or part of the costs  required to clean up
sites at which such wastes have been disposed.

         Environmental   Impact   Statement.    The   United   States   National
Environmental  Policy Act of 1969 (the "NEPA") applies to certain  extensions or
additions  to  a  pipeline  system.  Under  NEPA,  if  any  project  that  would
significantly  affect  the  quality  of the  environment  requires  a permit  or
approval from any United States Federal agency, a detailed  environmental impact
statement  must be  prepared.  The effect of the NEPA may be to delay or prevent
construction of new facilities or to alter their  location,  design or method of
construction.

         Indemnification.  KPL has agreed to indemnify the  Partnership  against
liabilities for damage to the environment  resulting from operations of the East
Pipeline prior to October 3, 1989. Such  indemnification  does not extend to any
liabilities  that arise  after such date to the extent such  liabilities  result
from change in environmental laws or regulations.  Under such indemnity,  KPL is
presently liable for the remediation of groundwater contamination resulting from
three spills and the possible groundwater contamination at a pumping and storage
site referred to under  "Water" to the standards  that are in effect at the time
such remediation  operations are concluded.  In addition,  ST's former owner has
agreed to  indemnify  the  Partnership  against  liabilities  for damages to the
environment  from  operations  conducted  by such former owner prior to March 2,
1993. The indemnity, which expired March 1, 1998, is limited in amount to 60% of
any claim exceeding  $100,000 until an aggregate  amount of $10 million has been
paid by ST's former owner.  In addition,  with respect to unknown  environmental
expenses  from  operations  conducted  by Wyco  Pipe Line  Company  prior to the
closing of the Partnership's  acquisition of the West Pipeline,  KPOP has agreed
to pay the first $150,000 of such expenses, KPOP and Wyco Pipe Line Company will
share, on an equal basis,  the next $900,000 of such expenses and Wyco Pipe Line
Company will  indemnify  KPOP for up to $2,950,000 of such expenses  thereafter.
The  indemnity  expires  in  August  1999.  To  the  extent  that  environmental
liabilities exceed the amount of such indemnity,  KPOP has affirmatively assumed
the excess environmental liabilities.


Safety Regulation

         The Pipelines are subject to regulation by the United States Department
of  Transportation  under  the  Hazardous  Liquid  Pipeline  Safety  Act of 1979
("HLPSA")  relating  to  the  design,   installation,   testing,   construction,
operation,  replacement and management of their pipeline  facilities.  The HLPSA
covers petroleum and petroleum  products  pipelines and requires any entity that
owns or operates pipeline  facilities to comply with such safety regulations and
to permit  access to and  copying of records  and to make  certain  reports  and
provide information as required by the Secretary to Transportation.  The Federal
Pipeline  Safety Act of 1992  amended the HLPSA to include  requirements  of the
future use of internal inspection devices. The Partnership does not believe that
it will be required to make any substantial capital  expenditures to comply with
the requirements of HLPSA as so amended.

         The  Partnership  is subject to the  requirements  of the United States
Federal  Occupational  Safety and  Health  Act  ("OSHA")  and  comparable  state
statutes  that regulate the  protection of the health and safety of workers.  In
addition,   the  OSHA  hazard  communication   standard  requires  that  certain
information  be  maintained  about  hazardous  materials  used  or  produced  in
operations and that this  information be provided to employees,  state and local
authorities  and  citizens.  The  Partnership  believes  that  it is in  general
compliance with OSHA requirements,  including general industry standards, record
keeping requirements and monitoring of occupational exposure to benzene.

         The OSHA hazard communication standard, the EPA community right-to-know
regulations   under  Title  III  of  the   Federal   Superfund   Amendment   and
Reauthorization  Act, and comparable  state statutes  require the Partnership to
organize  information  about the  hazardous  materials  used in its  operations.
Certain parts of this information must be reported to employees, state and local
governmental  authorities,  and local  citizens  upon request.  In general,  the
Partnership  expects to  increase  its  expenditures  during the next  decade to
comply  with higher  industry  and  regulatory  safety  standards  such as those
described above. Such expenditures cannot be accurately  estimated at this time,
although  they  are  not  expected  to have a  material  adverse  impact  on the
Partnership.


Employees

         The  Partnership  has no employees.  The business of the Partnership is
conducted by the General Partner,  KPL, which at December 31, 1998, employed 540
persons.  Approximately  183 of the  persons  employed  by KPL were  subject  to
representation by unions for collective  bargaining purposes;  however,  only 77
persons  employed  at four of KPL's  terminal  unit  locations  were  subject to
collective  bargaining  or  similar  contracts  at that  date.  Union  contracts
regarding  conditions on employment for 36, 12, 20 and 9 employees are in effect
through  June 28, 1999,  November 1, 2000,  June 30, 2001 and February 28, 2002,
respectively. All such contracts are subject to automatic renewal for successive
one year periods  unless either party  provides  written  notice to terminate or
modify such agreement in a timely manner.


Item 2.    Properties

         The  properties   owned  or  utilized  by  the   Partnership   and  its
subsidiaries  are  generally  described  in  Item 1 of this  Report.  Additional
information  concerning the obligations of the Partnership and its  subsidiaries
for lease and rental commitments is presented under the caption "Commitments and
Contingencies" in Note 6 to the Partnership's consolidated financial statements.
Such descriptions and information are hereby incorporated by reference into this
Item 2.

         The  properties  used in the  operations  of the Pipelines are owned by
KPP, through its subsidiary entities, except for KPL's operational headquarters,
located in Wichita,  Kansas,  which is held under a lease that  expires in 2004.
The majority of ST's facilities are owned,  while the remainder,  including most
of  its  terminal   facilities   located  in  port  areas  and  its  operational
headquarters,  located in Dallas,  Texas,  are held pursuant to lease agreements
having various expiration dates, rental rates and other terms.


Item 3.    Legal Proceedings

         Certain  subsidiaries  of the  Partnership  are defendants in a lawsuit
filed in a Texas state court in 1997 by Grace Energy Corporation ("Grace"),  the
entity from whom the Partnership  acquired ST in 1993,  involving certain issues
allegedly arising out of the Partnership's acquisition of ST. Grace alleges that
the defendants  assumed  responsibility for certain  environmental  damages to a
former ST facility located in Massachusetts that occurred at a time prior to the
Partnership's acquisition of ST. The defendants have also received and responded
to inquiries  from two  governmental  authorities  in  connection  with the same
allegation  by Grace.  The  defendants'  consistent  position is that it did not
acquire  the  facility  in  question  as part of the  1993 ST  transaction  and,
consequently,  did not assume any responsibility  for the environmental  damage.
The case is set for trial in June, 1999.

         Additionally,  the Partnership is a party to several lawsuits  arising,
from time to time,  in the  ordinary  course of  business.  Subject  to  certain
deductibles and self-insurance retentions,  substantially all the claims made in
these lawsuits are covered by insurance policies.

Item 4.    Submission of Matters to a Vote of Security Holders

         The  Partnership  did not hold a meeting of  Unitholders  or  otherwise
submit any matter to a vote of security holders in the fourth quarter of 1998.


                                     PART II


Item 5.    Market for the Registrant's Units and Related Unitholder Matters

         The Partnership's  limited  partnership  interests ("Units") are listed
and traded on the New York Stock Exchange (the "NYSE"),  under the symbol "KPP."
At March 15, 1999, there were  approximately  1,000  Unitholders.  On August 14,
1998, the Partnership paid its regular  quarterly cash distribution of $0.65 per
Unit to the holders of each class of the Partnership's  outstanding  Units. This
cash   distribution   represented   the  twelfth   consecutive   quarterly  cash
distribution  of Available Cash  constituting  Cash from Operations in an amount
equal to or exceeding the $0.55 Minimum  Quarterly  Distribution,  as such terms
are defined in the  Partnership's  Amended  and  Restated  Agreement  of Limited
Partnership (the "Partnership Agreement"). As a result of this payment, pursuant
to the terms of the Partnership Agreement, the Preference Period ended effective
July 1, 1998, and all differences and  distinctions  between Senior  Preference,
Preference and Common Units automatically ceased as of such date.  Consequently,
as of August 14, 1998, all outstanding units of limited partnership interests in
the  Partnership  were  designated  as "Units,"  constituting  a single class of
securities.  Set forth below are prices on the NYSE and cash  distributions  for
the  periods  indicated  for  Senior  Preference  Units  and  Preference  Units,
respectively, through August 14, 1998 and, thereafter, for Units.


<TABLE>
<CAPTION>
                           Senior Preference            Preference                                           Cash
                            Unit Prices (1)           Unit Prices (1)                Unit Prices (2)    Distributions
Year                      High         Low           High         Low             High          Low       Declared(3)
----                    ---------------------      ---------------------         ---------------------   -------------
<S>                      <C>         <C>            <C>         <C>              <C>          <C>          <C>
1997:
     First Quarter       31 1/4      28             28 5/8      26 1/2                                     $  .60
     Second Quarter      30 1/4      27 1/8         28 3/8      26 1/4                                        .60
     Third Quarter       31 13/16    29             30 7/8      27 7/8                                        .65
     Fourth Quarter      36 11/16    29 13/16       36 1/2      29 5/8                                        .65

1998:
     First Quarter       37 1/2      34 11/16       36 1/8      33 1/4                                        .65
     Second Quarter      37 7/8      34             35 5/8      33 5/16                                       .65
     Third Quarter       37 7/8      32 3/16        35 3/8      32 1/8           33           29 7/5          .65
     Fourth Quarter                                                              33 1/4       29 5/8          .65

1999:
     First Quarter                                                               34 7/16      29 3/8
        (through March 15, 1999)
</TABLE>

(1)  Through August 14, 1998
(2)  From August 14, 1998
(3)  The amounts shown were paid on each class of units.


         Under  the  terms  of its  financing  agreements,  the  Partnership  is
prohibited  from  declaring  or paying  any  distribution  if a  default  exists
thereunder.


Item 6.    SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA

         The  following  table  sets  forth,  for the  periods  and at the dates
indicated,  selected historical financial and operating data for Kaneb Pipe Line
Partners,  L.P. and subsidiaries (the "Partnership").  The data in the table (in
thousands,  except per unit  amounts) is derived from the  historical  financial
statements  of the  Partnership  and  should  be read in  conjunction  with  the
Partnership's  audited financial statements.  See also "Management's  Discussion
and Analysis of Financial Condition and Results of Operations."

<TABLE>
<CAPTION>
                                                                 Year Ended December 31,
                                         --------------------------------------------------------------------  
                                            1998           1997           1996         1995(a)         1994
                                         ---------     ----------      ----------    ----------    ----------
<S>                                      <C>           <C>             <C>           <C>           <C>    
Income Statement Data:
Revenues............................     $ 125,812     $  121,156      $ 117,554     $   96,928    $   78,745
                                         ---------     ----------      ---------     ----------    ----------

Operating costs.....................        52,200         50,183         49,925         40,617        33,586
Depreciation and amortization.......        12,148         11,711         10,981          8,261         7,257
General and administrative..........         6,261          5,793          5,259          5,472         4,924
                                         ---------     ----------      ---------     ----------    ----------

  Total costs and expenses..........        70,609         67,687         66,165         54,350        45,767
                                         ---------     ----------      ---------     ----------    ----------

Operating income....................        55,203         53,469         51,389         42,578        32,978
Interest and other income...........           626            562            776            894         1,299
Interest expense....................       (11,304)       (11,332)       (11,033)        (6,437)       (3,706)
Minority interest in net income.....          (441)          (420)          (403)          (360)         (295)
                                         ---------     -----------     ----------    -----------   -----------
Income before income taxes..........        44,084         42,279         40,729         36,675        30,276
Income tax provision (b)............          (418)          (718)          (822)          (627)         (818)
                                         ---------     -----------     ----------    -----------   -----------

Net income..........................     $  43,666     $   41,561      $  39,907     $   36,048    $   29,458
                                         =========     ==========      =========     ==========    ==========

Allocation of net income (c)(d) per:
    Unit............................     $    2.67
                                         =========
    Senior Preference Unit .........                   $     2.55      $    2.46     $     2.20    $     2.20
                                                       ==========      =========     ==========    ==========
    Preference Unit.................                   $     2.55      $    2.46     $     2.20    $     2.20
                                                       ==========      =========     ==========    ==========

Cash Distributions declared per (d):
    Unit............................     $    2.60
                                         =========
    Senior Preference Unit..........                   $     2.50      $    2.30     $     2.20    $     2.20
                                                       ==========      =========     ==========    ==========
    Preference Unit.................                   $     2.50      $    2.30     $     2.20    $     2.20
                                                       ==========      =========     ==========    ==========

Balance Sheet Data (at period end):
Property and equipment, net.........     $ 289,631     $  247,132      $ 249,733     $  246,471    $  145,646
Total assets........................       308,432        269,032        274,765        267,787       163,105
Long-term debt......................       153,000        132,118        139,453        136,489        43,265
Partners' capital...................       105,388        104,196        103,340        100,748        99,754
</TABLE>

(a)      Includes the operations of the West Pipeline  since its  acquisition in
         February 1995 and the  operations of Steuart since its  acquisition  in
         December 1995.  

(b)      Subsequent to the acquisition of ST in March 1993,  certain  operations
         are conducted in taxable entities.

(c)      Net income is allocated to the limited  partnership  units in an amount
         equal to the cash distributions  declared for each reporting period and
         any  remaining  income or loss is  allocated to any class of units that
         did not  receive  the same  amount of cash  distributions  per unit (if
         any).  If the same cash  distributions  per unit are  declared  for all
         classes  of units,  income or loss is  allocated  pro rata based on the
         aggregate amount of distributions declared.

(d)      Prior to the third quarter of 1998, the  Partnership  had three classes
         of  partnership   interests  designated  as  Senior  Preference  Units,
         Preference  Units  and  Common  Units,  respectively.  Pursuant  to the
         Partnership  Agreement,  on August 14,  1998,  each such class of units
         were  converted  into a single class  designated as "Units",  effective
         July 1, 1998. Allocations of net income and cash distributions declared
         were equal for all  classes of units in 1998.  See "Item 5 - Market for
         Registrant's Units and Related Unitholder Matters."


Item 7.    Management's Discussion and Analysis of Financial Condition 
           and Results of Operations

         This  discussion  should be read in conjunction  with the  consolidated
financial statements of Kaneb Pipe Line Partners, L.P. and notes thereto and the
summary  historical  financial  and operating  data  included  elsewhere in this
report.


General

         In September  1989,  Kaneb Pipe Line Company  ("KPL"),  a  wholly-owned
subsidiary of Kaneb Services, Inc. ("Kaneb"),  formed the Partnership to own and
operate  its refined  petroleum  products  pipeline  business.  The  Partnership
operates  through KPOP, a limited  partnership in which the Partnership  holds a
99% interest as limited partner and KPL owns a 1% interest as general partner in
both the  Partnership  and KPOP. The  Partnership is engaged  through  operating
subsidiaries  in the refined  petroleum  products  pipeline  business and, since
1993, terminaling and storage of petroleum products and specialty liquids.

         The  Partnership's   pipeline   business  consists   primarily  of  the
transportation  through  the East  Pipeline  and the West  Pipeline,  as  common
carriers, of refined petroleum products. The East Pipeline and the West Pipeline
are  collectively  referred  to as  the  "Pipelines."  The  Pipelines  primarily
transport  gasoline,  diesel  oil,  fuel  oil  and  propane.  The  products  are
transported from refineries connected to the Pipeline, directly or through other
pipelines,  to  agricultural  users,  railroads and  wholesale  customers in the
states in which the  Pipelines  are located  and in  portions  of other  states.
Substantially  all  of  the  Pipelines'  operations  constitute  common  carrier
operations  that are  subject  to  Federal  or  state  tariff  regulations.  The
Partnership  has not  engaged,  nor does it currently  intend to engage,  in the
merchant function of buying and selling refined petroleum products.

         The  Partnership's  business  of  terminaling  petroleum  products  and
specialty liquids is conducted under the name ST Services ("ST").

         On  October  30,  1998,   the   Partnership,   through  a  wholly-owned
subsidiary,   entered  into  acquisition  and  joint  venture   agreements  with
Northville  Industries  Corp.  ("Northville")  to acquire  and manage the former
Northville  terminal located in Linden,  New Jersey.  Under the agreements,  the
Partnership  acquired a 50% interest in the  newly-formed ST Linden Terminal LLC
for $20.5 million plus transaction costs. The petroleum storage facility,  which
has  capacity  of  3.9  million  barrels  in  22  tanks,  was  financed  by  the
Partnership's  existing  revolving  credit  facility and a revolving  promissory
note.

         On February 1, 1999, the Partnership, through two wholly-owned indirect
subsidiaries,  acquired six  terminals in the United  Kingdom from GATX Terminal
Limited for (pound)22.6 million  (approximately  $37.4 million) plus transaction
costs and the  assumption of certain  liabilities.  The  acquisition  of the six
locations,  which have an aggregate tankage capacity of 5.5 million barrels, was
financed by term loans from a bank. Three of the terminals,  handling  petroleum
products,  chemicals and molten sulfur,  respectively,  operate in England.  The
remaining three  facilities,  two in Scotland and one in Northern  Ireland,  are
primarily petroleum terminals.  All six terminals are served by deepwater marine
docks.

         The Partnership is the third largest  independent  liquids  terminaling
company in the United States. At December 31, 1998, ST operated 33 facilities in
18 states and the  District of Columbia  with an aggregate  tankage  capacity of
approximately 22.2 million barrels.



Pipeline Operations
<TABLE>
<CAPTION>
                                                                         Year Ended December 31,
                                                          ---------------------------------------------------  
                                                             1998                 1997                1996
                                                          -----------        --------------       -----------
                                                                             (in thousands)

<S>                                                       <C>                  <C>                <C>        
Revenues................................................  $    63,421          $    61,320        $    63,441
Operating costs.........................................       22,057               21,696             23,692
Depreciation and amortization...........................        4,619                4,885              4,817
General and administrative..............................        3,115                2,912              2,711
                                                          -----------          -----------        -----------
Operating income........................................  $    33,630          $    31,827        $    32,221
                                                          ===========          ===========        ===========
</TABLE>

         Pipelines  revenues are based on volumes shipped and the distances over
which such  volumes  are  transported.  For the year ended  December  31,  1998,
revenues  increased by $2.1 million,  or 3%, compared to 1997, due to an overall
increase in volumes shipped,  primarily on the East Pipeline. For the year ended
December 31, 1997,  revenues decreased by $2.1 million, or 3%, compared to 1996,
primarily as a result of adverse  effects on product  demand  caused by abnormal
weather  patterns  in the  Midwest  and  shifts in the  distribution  of product
supplies in the Rocky Mountain  area.  Because tariff rates are regulated by the
FERC,  the  Pipelines  compete  primarily  on the basis of quality  of  service,
including  delivering products at convenient locations on a timely basis to meet
the needs of its customers.  Barrel miles totaled 17.0 billion, 16.1 billion and
16.7 billion for the years ended December 31, 1998, 1997 and 1996, respectively.

         Operating  costs,  which  include fuel and power costs,  materials  and
supplies,  maintenance and repair costs, salaries,  wages and employee benefits,
and property and other taxes,  increased $0.4 million in 1998 and decreased $2.0
million in 1997.  The  changes in both years were  primarily  in  materials  and
supplies, including additives, that are volume related, and in outside services.
General and  administrative  costs,  which include  managerial,  accounting  and
administrative  personnel costs,  office rental expense,  legal and professional
costs and other  non-operating  costs,  increased by $0.2 million in each of the
years ended December 31, 1998 and 1997.


Terminaling Operations
<TABLE>
<CAPTION>

                                                                         Year Ended December 31,
                                                          ---------------------------------------------------
                                                             1998                 1997                1996
                                                          -----------      --------------         ----------- 
                                                                           (in thousands)

<S>                                                       <C>                <C>                  <C>        
Revenues................................................  $    62,391        $    59,836          $    54,113
Operating costs.........................................       30,143             28,487               26,233
Depreciation and amortization...........................        7,529              6,826                6,164
General and administrative..............................        3,146              2,881                2,548
                                                          -----------        -----------          -----------
Operating income........................................  $    21,573        $    21,642          $    19,168
                                                          ===========        ===========          ===========
</TABLE>

         For the years ended December 31, 1998 and 1997,  revenues  increased by
$2.6 million and $5.7 million,  respectively,  due to terminal  acquisitions and
increased  utilization of existing terminals due to favorable market conditions,
partially  offset by a decrease in the  overall  price  realized  for storage in
1998.  Average  annual  tankage  utilized for the years ended December 31, 1998,
1997 and 1996  aggregated  15.2 million  barrels,  12.4 million barrels and 11.9
million  barrels,  respectively.  The 1998 and 1997  increases in average annual
tankage utilized resulted from increased  storage at the  Partnership's  largest
petroleum storage facility and the terminal  acquisitions.  Average revenues per
barrel of tankage  utilized for the years ended December 31, 1998, 1997 and 1996
was $4.11,  $4.83 and $4.55,  respectively.  The decrease in 1998 was due to the
storage  of a larger  proportionate  volume  of  petroleum  products,  which are
historically at lower rates per barrel than specialty chemicals.

         Operating costs increased by $1.7 million in 1998 and $2.3 in 1997, due
to the  increases in tank  utilization  and terminal  acquisitions.  General and
administrative  expense  increased  by $0.3  million in each of the years  ended
December 31, 1998 and 1997.

         Total tankage  capacity (22.2 million barrels at December 31, 1998) has
been,  and is expected to remain,  adequate to meet  existing  customer  storage
requirements.  Customers  consider  factors  such as  location,  access  to cost
effective  transportation and quality of service,  in addition to pricing,  when
selecting terminal storage.


Liquidity and Capital Resources

         Cash provided by operating activities was $58.8 million,  $54.8 million
and $49.2 million for the years 1998, 1997 and 1996, respectively.  The increase
in  cash  provided  by  operations  in  1998  resulted  primarily  from  overall
improvements  in revenues and operating  income in the pipeline  operations from
increased  volumes  shipped.  The  increase  in 1997 was  primarily  a result of
improvements in revenues and operating income in the terminaling operations.

         At December 31, 1998, the Partnership had a net working capital deficit
of approximately  $23.1 million  resulting from, among other factors,  cash paid
and short-term debt incurred for acquisitions which closed near the end of 1998.
The General  Partner  believes  that the  Partnership  will be able to meets its
ongoing   obligations   with  cash  flows  from   operations,   along  with  the
Partnership's  ability to refinance  and/or issue  additional debt, and that the
Partnership's  ability to pay distributions to the holders of Units has not been
impaired; however, there can be no assurance in this regard.

         Capital expenditures,  excluding expansion capital  expenditures,  were
$9.4  million,  $10.6  million  and  $7.1  million  for  1998,  1997  and  1996,
respectively.   During  all  periods,  adequate  pipeline  capacity  existed  to
accommodate  volume growth and the expenditures  required for  environmental and
safety  improvements  were  not,  and  are not  expected  in the  future  to be,
material.  Environmental damages caused by sudden and accidental occurrences are
included under the Partnership's  insurance  coverages.  Capital expenditures of
the Partnership  during 1999 are expected to be approximately $12 million to $16
million.  Such future expenditures,  however, will depend on many factors beyond
the Partnership's  control,  including,  without limitation,  demand for refined
petroleum products and terminaling  services in the Partnership's  market areas,
local, state and Federal governmental regulations, fuel conservation efforts and
the  availability  of financing on acceptable  terms.  No assurance can be given
that required capital  expenditures will not exceed  anticipated  amounts during
the year or thereafter or that the Partnership  will have the ability to finance
such expenditures through borrowings or choose to do so.

         The Partnership makes quarterly  distributions of 100% of its Available
Cash, as defined in the Partnership Agreement, to holders of limited partnership
units ("Unitholders") and the Company.  Available Cash consists generally of all
the cash receipts less all cash  disbursements  and reserves.  Distributions  of
$2.60 per unit were declared to Unitholders in 1998, $2.50 per unit was declared
in 1997 and $2.30 per unit was declared in 1996. Payment of the August 14, 1998,
regular  cash  distribution   represented  the  twelfth  consecutive   quarterly
distribution  of Available Cash  constituting  Cash from Operations in an amount
equal to or exceeding the $0.55 Minimum Quarterly  Distribution specified in the
Partnership  Agreement.  Accordingly,  pursuant to the terms of the  Partnership
Agreement,  all differences and distinctions  between Senior  Preference  Units,
Preference Units and Common Units automatically  ceased as of such date. At that
time, all outstanding units of limited  partnership  interest in the Partnership
became "Units" constituting a single class of equity securities,  which trade on
the New York Stock Exchange under the symbol "KPP".

         The  Partnership   expects  to  fund  future  cash   distributions  and
maintenance  capital  expenditures  with  existing  cash  and  cash  flows  from
operating  activities.  Expansionary  capital  expenditures  are  expected to be
funded  through  additional  Partnership  borrowings  and/or  future public unit
offerings.

         In October 1998, a wholly-owned  subsidiary of the Partnership  entered
into a Promissory  Note  Agreement  with a bank that,  as amended on February 1,
1999,  provides a $15 million  revolving  credit  availability  through June 30,
1999. The Promissory  Note Agreement  bears interest at variable  interest rates
and has a commitment fee of 0.35% per annum of the unused available balance.  At
December 31, 1998, $10.0 million was drawn under the Promissory Note Agreement.

         The  Partnership  has a Credit  Agreement with two banks that currently
provides a $25 million  revolving  credit facility for working capital and other
partnership  purposes.  Borrowings  under the Credit  Agreement bear interest at
variable rates and are due and payable in January 2001. The Credit Agreement has
a commitment fee of 0.15% per annum of the unused credit  facility.  At December
31, 1998, $25.0 million was drawn under this credit facility.

         In the  FERC's  Lakehead  decision  issued  June  15,  1995,  the  FERC
partially  disallowed  Lakehead's  inclusion  of  income  taxes  in its  cost of
service.  Specifically,  the FERC held that  Lakehead was entitled to receive an
income tax  allowance  with  respect  to income  attributable  to its  corporate
partners,  but  was  not  entitled  to  receive  such an  allowance  for  income
attributable to the partnership interests held by individuals. Lakehead's motion
for rehearing  was denied by the FERC and Lakehead  appealed the decision to the
U. S. Court of Appeals.  Subsequently,  the case was settled by Lakehead and the
appeal was  withdrawn.  In another  FERC  proceeding  involving a different  oil
pipeline  limited  partnership,  various  shippers  challenged  such  pipeline's
inclusion of an income tax allowance in its cost of service. The FERC Staff also
supported the  disallowance of income taxes.  The FERC recently decided the case
on the same basis as the Lakehead  case. If the FERC were to disallow the income
tax  allowance in the cost of service of the Pipelines on the basis set forth in
the Lakehead order, the General Partner believes that the Partnership's  ability
to pay distributions to the holders of the Units would not be impaired; however,
in view of the uncertainties  involved in this issue,  there can be no assurance
in this regard.


Year 2000 Issue

         Although  the  Partnership  believes  that most of its  activities  and
operations  are  not  materially  impacted  by Year  2000  Issues  ("Y2K"),  the
Partnership  recognizes the challenges  associated with Y2K and has undertaken a
review  and  testing of its  computer  systems to  identify  Y2K-related  issues
associated  with  any  items  of  software  or  hardware  used  in its  business
operations.  Most of the software  systems used by the  Partnership are licensed
from third  parties and are Y2K  compliant or will be upgraded to Y2K  compliant
releases  before  the  end  of  1999.  This  issue  is  being  addressed  by the
Partnership in multiple phases, including assessment,  remediation,  testing and
implementation,  and progress is being monitored by the general partner's senior
management.  All material systems,  including non-information technology systems
which may house non-compliant, embedded technology are being evaluated.

         In addition to addressing the Partnership's  own systems,  as described
above,  the  Partnership  must assess the state of  readiness  of the systems of
other  entities with which it does  business.  Failure by these third parties to
adequately  resolve their Y2K problems  could have a material  adverse effect on
the Partnership's operations.

         The Partnership believes its success in being Y2K compliant will not be
conclusively known until the year 2000 is actually reached.  Although failure by
one or more of the  Partnership's  own  systems  could  result in lost  revenues
and/or   additional   expenses  required  to  carry  out  manual  processing  of
transactions,  the  Partnership  cannot predict the effect that external  forces
could   have  on  its   business.   Failures   by  banking   institutions,   the
telecommunications  industry and others could have  far-reaching  effects on the
entire economy and the Partnership.

         The Partnership's operations (including both information technology and
non-information  technology  systems)  are in varying  states of  readiness  for
compliance with Y2K issues.  The initial assessment phase has been completed for
substantially  all  of  the  Partnership's   operations,   and  in  many  cases,
remediation, testing and implementation activities have also been completed. The
Partnership  expects to complete all phases of its Y2K program prior to December
31, 1999.

         The  Partnership  believes  that it is not possible to  determine  with
certainty that all Y2K problems  affecting the Partnership  have been identified
or corrected.  The number of devices that could be affected and the interactions
among these devices are simply too numerous. In addition, the Partnership cannot
accurately  predict how many  failures  related to the Y2K problem will occur or
the  severity,   duration  or  financial  consequences  of  such  failures.  The
Partnership  has hired an outside Y2K  consultant to assist the  Partnership  in
meeting its goals and in developing  contingency plans to define and address the
worst-case scenario likely to be faced by the Partnership.  The plan is expected
to be in place by the end of the second quarter of 1999.

         Expenses incurred by the Partnership  during 1998 and 1997,  related to
assessing,  remediating and testing its information  technology  systems,  which
were not material,  have been  expensed as incurred and funded from  operations.
The Partnership  does not anticipate that the cost to become fully Y2K compliant
will be material.


Allocation of Net Income and Earnings

         Net income or loss is allocated  between limited partner  interests and
the general partner pro rata based on the aggregate amount of cash distributions
declared (including general partner incentive distributions). Beginning in 1997,
distributions  by the  Partnership  of Available  Cash reached the Second Target
Distribution,  as defined  in the  Partnership  Agreement,  which  entitled  the
general partner to receive certain  incentive  distributions at different levels
of cash distributions. Earnings per Unit shown on the consolidated statements of
income are calculated by dividing the limited  partners'  interest in net income
by the weighted average number of Units outstanding. If the allocation of income
had been made as if all income had been  distributed in cash,  earnings per Unit
would have been $2.66 and $2.53 for the years ended  December 31, 1998 and 1997,
respectively.


Item 7(a).    Quantitative and Qualitative Disclosure About Market Risk

         The  principal  market risks  (i.e.,  the risk of loss arising from the
adverse  changes in market rates and prices) to which the Partnership is exposed
are interest  rates on the  Partnership's  debt and investment  portfolios.  The
Partnership  centrally  manages its debt and investment  portfolios  considering
investment  opportunities  and  risks  and  overall  financing  strategies.  The
Partnership's  investment  portfolio consists of cash equivalents;  accordingly,
the carrying amounts  approximate fair value. The Partnership's  investments are
not  material to the  financial  position  or  performance  of the  Partnership.
Assuming  year-end 1998 variable rate debt and investment  levels, a one percent
change in interest  rates would increase net interest  expense by  approximately
$0.4 million.


Item 8.    Financial Statements and Supplementary Data

         The financial  statements  and  supplementary  data of the  Partnership
begin on page F-1 of this report.  Such  information is hereby  incorporated  by
reference into this item 8.


Item 9.    Changes in and Disagreements with Accountants on Accounting 
           and Financial Disclosure.

         Reference is made to the Registrant's  Current Reports on Forms 8-K and
8-K/A, dated November 6, 1998 and March 9, 1999, respectively, which reports are
incorporated herein by reference.



                                    PART III


Item 10.   Directors and Executive Officers of the Registrant

         The  Partnership  is a limited  partnership  and has no directors.  The
Partnership  is managed by KPL as general  partner.  Set forth  below is certain
information  concerning  the  directors  and  executive  officers  of  KPL.  All
directors of the Company are elected annually by Kaneb, as its sole stockholder.
All officers serve at the discretion of the Board of Directors of KPL.
<TABLE>
<CAPTION>
                                       Position with               Years of Service                         % of
Name                  Age                   KPL                        With KPL             Units(m)        O/S
-------------------- ------- ---------------------------------- ------------------------ --------------- -----------
<S>                    <C>                                                <C>                  <C>          <C>  
Edward D. Doherty      63    Chairman of the Board and                    9 (a)                85,626        *
                               Chief  Executive Officer
Leon E. Hutchens       64    President                                   39 (b)                   500        *
Ronald D. Scoggins     44    Senior Vice President                        2 (c)                   824        *
Jimmy L. Harrison      45    Vice President and Controller                7 (d)                  -0-         *
Howard C. Wadsworth    54    Vice President, Treasurer                    5 (e)                  -0-         *
                               and Secretary
Sangwoo Ahn            60    Director                                    10 (f)                33,000        *
John R. Barnes         54    Director                                    12 (g)               216,100        1%
Murray A. Biles        68    Director                                    45 (h)                   500        *
Frank M. Burke, Jr.    59    Director                                     2 (i)                  -0-         *
Charles R. Cox         56    Director                                     4 (j)                   500        *
Hans Kessler           49    Director                                     2 (k)                  -0-         *
James R. Whatley       72    Director                                    10 (l)                22,400        *
                  All Officers and Directors as a group (12 persons)                          359,450       2.0%
</TABLE>

*Less than one percent

(a)      Mr. Doherty,  Chairman of the Board and Chief Executive  Officer of KPL
         since September 1989, is also Senior Vice President of Kaneb.

(b)      Mr. Hutchens assumed his current position in January 1994,  having been
         with KPL since January 1960. Mr. Hutchens had been Vice President since
         January 1981.  Mr.  Hutchens was Manager of Product  Movement from July
         1976 to January 1981.

(c)      Mr. Scoggins became an executive  officer of KPL in August 1997,  prior
         to which he served in senior  level  positions  for ST for more than 10
         years.

(d)      Mr. Harrison  assumed his present  position in November 1992,  prior to
         which he served in a variety of financial positions including Assistant
         Secretary and Treasurer  with ARCO Pipe Line Company for  approximately
         19 years.

(e)      Mr.  Wadsworth also serves as Vice  President,  Treasurer and Secretary
         for Kaneb. Mr. Wadsworth joined Kaneb in October 1990.

(f)      Mr.  Ahn, a director  of KPL since  July  1989,  is also a director  of
         Kaneb.  Mr. Ahn has been a general  partner of Morgan  Lewis  Githens &
         Ahn, an investment  banking firm,  since 1982 and currently serves as a
         director of Gradall  Industries,  Inc.,  ITI  Technologies,  Inc.,  PAR
         Technology   Corporation,   Quaker  Fabric   Corporation,   and  Stuart
         Entertainment, Inc.

(g)      Mr. Barnes, a director of KPL, is also Chairman of the Board, President
         and Chief Executive Officer of Kaneb.

(h)      Mr.  Biles  joined KPL in November  1953 and served as  President  from
         January 1985 until his retirement at the close of 1993.

(i)      Mr. Burke,  a director of KPL since January 1997, is also a director of
         Kaneb.  Mr. Burke has been  Chairman and  Managing  General  Partner of
         Burke,  Mayborn Company,  Ltd., a private investment company,  for more
         than the past five years. Mr. Burke also currently serves as a director
         of  Medicalcontrol,  Inc.  He  was  previously  associated  with  Peat,
         Marwick,  Mitchell  & Co.  (now KPMG  LLP),  an  international  firm of
         certified public accountants, for twenty-four years.

(j)      Mr. Cox, a director of KPL since  September 1995, is also a director of
         Kaneb. Mr. Cox has been a private business consultant since retiring in
         January  1998  from  Fluor  Daniel,  Inc.,  an  international  services
         company,  where he served in senior  executive level positions during a
         27 year career with that organization.

(k)      Mr.  Kessler was  elected to the Board on  February  19, 1998 to fill a
         vacancy.  Mr.  Kessler has served as Chairman and Managing  Director of
         KMB Kessler + Partner  GmbH since 1992.  He was  previously  a Managing
         Director   and  Vice   President   of  a  European   Division  of  Tyco
         International Ltd.

(l)      Mr.  Whatley,  a director of KPL since July 1989, is also a director of
         Kaneb and served as  Chairman of the Board of  Directors  of Kaneb from
         February 1981 until April 1989.

(m)      Partnership  Units  listed are those  beneficially  owned by the person
         indicated,  his spouse or  children  living at home and do not  include
         Units in which the person has disclaimed any beneficial interest.


Audit Committee

         Messrs. Sangwoo Ahn and Frank M. Burke, Jr. serve as the members of the
Audit  Committee  of KPL.  Such  Committee  will,  on an annual  basis,  or more
frequently as such Committee may determine to be  appropriate,  review  policies
and practices of the Company and the  Partnership  and deal with various matters
as to which potential conflicts of interest may arise.


Committee Interlocks and Insider Participation

         The Company's Board of Directors does not have a compensation committee
or any other committee that performs the equivalent functions. During the fiscal
year ended December 31, 1998,  none of KPL's officers or employees  participated
in the  deliberations of KPL's Board of Directors  concerning  executive officer
compensation.


Section 16(a) Beneficial Ownership Reporting Compliance Statement

         Section  16(a) of the  Securities  and Exchange Act of 1934, as amended
("Section 16(a)") requires the Company's  officers and directors,  among others,
to file  reports of  ownership  and changes of  ownership  in the  Partnership's
equity  securities with the Securities and Exchange  Commission and the New York
Stock Exchange. Such persons are also required by related regulations to furnish
the Company with copies of all Section 16(a) forms that they file.

         Based solely on its review of the copies of such forms  received by it,
KPL believes  that,  since  January 1, 1998,  its officers  and  directors  have
complied  with  all  applicable   filing   requirements   with  respect  to  the
Partnership's  equity  securities,  except that rather than being  reported on a
timely  Form 4, Mr.  Barnes  reported  on a Form 5 two  acquisitions  of a small
number of Units by a family  trust of which he is neither the  grantor,  trustee
nor beneficiary and in which he disclaims any beneficial ownership.


Item 11.   Executive Compensation

         The  Partnership  has  no  executive  officers,  but  is  obligated  to
reimburse  the  Company for  compensation  paid to KPL's  executive  officers in
connection with their operation of the Partnership's business.

         The  following  table  sets  forth  information  with  respect  to  the
aggregate  compensation  paid or accrued by the Company  during the fiscal years
1998, 1997 and 1996, to the Chief  Executive  Officer and each of the other most
highly compensated executive officers of KPL.

                           SUMMARY COMPENSATION TABLE

Name and Principal                   Annual Compensation             All Other
   Position           Year        Salary(a)          Bonus(b)    Compensation(c)
-------------------- -----      -----------------------------    ---------------

Edward D. Doherty(d)  1998      $  216,758        $      -0-           $  6,402
  Chairman of the     1997         208,350             18,420(f)          6,541
  Board and Chief     1996         200,333             93,040             6,832
  Executive Officer

Leon E. Hutchens      1998         188,083             10,000             7,027
  President           1997         180,617               -0-              7,338
                      1996         173,700             15,000             7,051

Ronald D. Scoggins(d) 1998         161,348(e)             -0-             6,100
  Senior Vice         1997         139,899(e)           9,210(g)          5,003
  President 

Jimmy L. Harrison     1998         117,000              5,000             3,120
  Vice President      1997         110,532                -0-             2,854
  Controller          1996         105,532              4,000             3,775
                                                             
(a)      Amounts  for  1998,  1997  and  1996,  respectively,  include  deferred
         compensation  for Mr.  Doherty  ($13,692,  $12,980  and  $14,901);  Mr.
         Hutchens  ($4,869,  $922 and  $2,529);  and Mr.  Scoggins  ($10,600 and
         $7,950).

(b)      Amounts earned in year shown and paid the following year.

(c)      Represents the Company's  contributions  to Kaneb's Savings  Investment
         Plan (a 401(k) plan) and the imputed value of  Company-paid  group term
         life insurance.

(d)      The  compensation  for these  individuals  is paid by  Kaneb,  which is
         reimbursed for all or substantially all of such compensation by KPL.

(e)      Amounts for 1998 and 1997, respectively, include $31,131 and $13,608 in
         the form of Partnership  Units (412 and 227) and Kaneb  Services,  Inc.
         Common Stock (1,322 and 1,927).

(f)      Includes deferred compensation of $18,420.

(g)      Includes deferred compensation of $9,210.


 Director's Fees

         During 1998,  each member of KPL's Board of Directors  who was not also
an employee  of the  Company or Kaneb was paid an annual  retainer of $10,000 in
lieu of all attendance fees.


Item 12.   Security Ownership of Certain Beneficial Owners and Management

      At March 15, 1999, KPL owned a combined 2% General Partner interest in the
Partnership and KPOP and, together with its affiliates, owned Units representing
an aggregate limited partner interest of approximately 31%.


Item 13.   Certain Relationships and Related Transactions

         KPL  is  entitled  to  certain  reimbursements  under  the  Partnership
Agreement.  For additional  information  regarding the nature and amount of such
reimbursements,   see  Note  7  to  the  Partnership's   consolidated  financial
statements.


                                     PART IV


Item 14.   Exhibits, Financial Statement Schedules, and Reports on Form 8-K

    (a) (1)Financial Statements                                        Beginning
                                                                         Page

         Set forth below is a list of  financial  statements  appearing  in this
         report.

    Kaneb Pipe Line Partners, L.P. and Subsidiaries Financial Statements:
      Consolidated Statements of Income - 
        Three Years Ended December 31, 1998..........................     F - 1
      Consolidated Balance Sheets - December 31, 1998 and 1997.......     F - 2
      Consolidated Statements of Cash Flows - 
        Three Years Ended December 31, 1998..........................     F - 3
      Consolidated Statements of Partners' Capital -
        Three Years ended December 31, 1998..........................     F - 4
      Notes to Consolidated Financial Statements.....................     F - 5
      Reports of Independent Accountants.............................     F - 13


    (a) (2)Financial Statement Schedules

         All schedules for which provision is made in the applicable  accounting
         regulation of the Securities  and Exchange  Commission are not required
         under the related instructions or are inapplicable,  and therefore have
         been omitted.


    (a) (3)List of Exhibits

3.1      Amended and Restated  Agreement of Limited  Partnership dated September
         27, 1989,  filed as Appendix A to the  Registrant's  Prospectus,  dated
         September 25, 1989, in connection  with the  Registrant's  Registration
         Statement  on Form S-1  (S.E.C.  File No.  33-30330)  which  exhibit is
         hereby incorporated by reference.

10.1     ST Agreement  and Plan of Merger date  December 21, 1992 by and between
         Grace Energy  Corporation,  Support Terminal Services,  Inc.,  Standard
         Transpipe Corp., and Kaneb Pipe Line Operating Partnership,  NSTS, Inc.
         and NSTI,  Inc. as amended by Amendment of STS Merger  Agreement  dated
         March 2, 1993,  filed as Exhibit 10.1 of the  exhibits to  Registrant's
         Current  Report on Form 8-K ("Form 8-K"),  dated March 16, 1993,  which
         exhibit is hereby incorporated by reference.

10.2     Restated Credit  Agreement  between Kaneb Operating  Partnership,  L.P.
         ("KPOP"),  Texas  Commerce  Bank,  N.A.,  ("TCB"),  and  certain  other
         Lenders,  dated December 22, 1994 (the "TCB Loan Agreement"),  filed as
         Exhibit 10.13 of the exhibits to the Registrant's Annual Report on Form
         10-K ("Form 10-K") for the year ended December 31, 1994,  which exhibit
         is hereby incorporated by reference.

10.3     Amendmentto  the TCB Loan Agreement,  dated January 30, 1998,  filed as
         Exhibit 10.3 to the Registrant's  Form 10-K for the year ended December
         31, 1997.

10.4     Pledge and Security  Agreement  between Kaneb Pipe Line Company ("KPL")
         and TCB, dated October 11, 1993 (the "TCB Security  Agreement"),  filed
         as Exhibit 10.3 of the exhibits to the  Registrant's  Form 10-K for the
         year ended December 31, 1993,  which exhibit is hereby  incorporated by
         reference.

10.5     Amendment to the TCB Security Agreement, filed herewith.

10.5     Note Purchase  Agreements,  dated  December 22, 1994,  filed as Exhibit
         10.2 of the  exhibits to  Registrant's  Form 8-K,  dated March 13, 1995
         (the "March 1995 Form 8-K"),  which exhibit is hereby  incorporated  by
         reference.

10.6     Note Purchase Agreements, dated June 27, 1996, filed as Exhibit 10.5 of
         the exhibits to the Registrant's  Form 10-K for the year ended December
         31, 1996, which exhibit is hereby incorporated by reference.

10.7     Agreement  for Sale and  Purchase  of  Assets  between  Wyco  Pipe Line
         Company and KPOP, dated February 19, 1995, filed as Exhibit 10.1 of the
         exhibits  to the  Registrant's  March 1995 Form 8-K,  which  exhibit is
         hereby incorporated by reference.

10.8     Asset Purchase  Agreements between and among Steuart Petroleum Company,
         SPC Terminals,  Inc., Piney Point Industries,  Inc., Steuart Investment
         Company,  Support Terminals  Operating  Partnership,  L.P. and KPOP, as
         amended, dated August 27, 1995, filed as Exhibits 10.1, 10.2, 10.3, and
         10.4 of the exhibits to  Registrant's  Current Report on Form 8-K dated
         January 3, 1996, which exhibits are hereby incorporated by reference.

10.9     Formationand  Purchase  Agreement,  between and among Support  Terminal
         Operating  Partnership,  L.P.,  Northville  Industries Corp. and AFFCO,
         Corp., dated October 30, 1998, filed herewith.

10.10    Agreement,  between and among,  GATX  Terminals  Limited,  ST Services,
         Ltd., ST Eastham, Ltd., GATX Termianls  Corporation,  Support Terminals
         Operating Partnership,  L.P. and Kaneb Pipe Line Partners,  L.P., dated
         January 26, 1999, filed herewith.

10.11    Credit  Agreement,   between  and  among,  Kaneb  Pipe  Line  Operating
         Partnership,  L.P., ST Services, Ltd. and Suntrust Bank, Atlanta, dated
         January 27, 1999, filed herewith.

21       List of Subsidiaries, filed herewith.

27       Financial Data Schedule, filed herewith.


    (b)   Reports on Form 8-K

        Current  Report  on Form  8-K  regarding  a change  in the  Registrant's
Certifying Accountant, dated November 6, 1998.

        Current Report on Form 8-K regarding the Acquisition of certain Terminal
Storage Facilities located in the United Kingdom, dated February 12, 1999.

        Current  report on Form  8-K/A  regarding  a change in the  Registrant's
Certifying Accountant, dated March 9, 1999.


<PAGE>


                 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                           Year Ended December 31,
                                                          ---------------------------------------------------------
                                                               1998                 1997                 1996
                                                          -------------         -------------        --------------
<S>                                                       <C>                   <C>                  <C>           
Revenues..............................................    $ 125,812,000         $ 121,156,000        $  117,554,000
                                                          -------------         -------------        --------------
Costs and expenses:
   Operating costs....................................       52,200,000            50,183,000            49,925,000
   Depreciation and amortization......................       12,148,000            11,711,000            10,981,000
   General and administrative.........................        6,261,000             5,793,000             5,259,000
                                                          -------------         -------------        --------------


      Total costs and expenses........................       70,609,000            67,687,000            66,165,000
                                                          -------------         -------------        --------------


Operating income......................................       55,203,000            53,469,000            51,389,000

Interest and other income.............................          626,000               562,000               776,000
Interest expense......................................      (11,304,000)          (11,332,000)          (11,033,000)
                                                          -------------         --------------       ---------------
Income before minority
   interest and income taxes..........................       44,525,000            42,699,000            41,132,000

Minority interest in net income.......................         (441,000)             (420,000)             (403,000)

Income tax provision..................................         (418,000)             (718,000)             (822,000)
                                                          -------------         --------------       ---------------
Net income ...........................................       43,666,000            41,561,000           39,907,000

General partner's interest
   in net income......................................         (735,000)             (560,000)             (403,000)
                                                          -------------         --------------       ---------------
Limited partners' interest
   in net income......................................    $  42,931,000         $  41,001,000        $   39,504,000
                                                          =============         =============        ==============
Allocation of net income per
   Unit as described in Note 2........................    $        2.67         $        2.55        $         2.46
                                                          =============         =============        ==============
Weighted average number of Partnership
   units outstanding..................................       16,060,000            16,060,000            16,060,000
                                                          =============         =============        ==============
</TABLE>



<PAGE>


                 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                                                         December 31,
                                            ----------------------------------- 
                                                  1998                 1997
                                            -------------        --------------
             ASSETS
Current assets:
   Cash and cash equivalents...........     $     849,000        $    6,376,000
   Accounts receivable.................        13,917,000            11,503,000
   Prepaid expenses....................         4,035,000             4,021,000
                                            -------------        --------------
      Total current assets.............        18,801,000            21,900,000
                                            -------------        --------------

Property and equipment.................       398,253,000           345,802,000
Less accumulated depreciation..........       108,622,000            98,670,000
                                            -------------        --------------
      Net property and equipment.......       289,631,000           247,132,000
                                            -------------        --------------
                                            $ 308,432,000        $  269,032,000
                                            =============        ==============

      LIABILITIES AND PARTNERS' CAPITAL

Current liabilities:
   Short-term and current portion 
     of long-term debt.................     $  10,000,000        $    2,335,000
   Accounts payable....................         3,939,000             2,400,000
   Accrued expenses....................         4,809,000             3,297,000
   Accrued distributions payable.......        10,725,000            10,725,000
   Accrued taxes, other than 
     income taxes......................         2,080,000             1,957,000
   Deferred terminaling fees...........         3,526,000             2,892,000
   Payable to general partner..........         6,785,000             1,143,000
                                            -------------        --------------
      Total current liabilities........        41,864,000            24,749,000
                                            -------------        --------------

Long-term debt, less current portion...       153,000,000           132,118,000

Other liabilities and deferred taxes...         7,131,000             6,935,000

Minority interest......................         1,049,000             1,034,000

Commitments and contingencies

Partners' capital:
   Limited partners....................       104,342,000           103,167,000
   General partner.....................         1,046,000             1,029,000
                                            -------------        --------------
      Total partners' capital..........       105,388,000           104,196,000
                                            -------------        --------------
                                            $ 308,432,000        $  269,032,000
                                            =============        ==============





<PAGE>


                 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                           Year Ended December 31,
                                                         ----------------------------------------------------------
                                                              1998                 1997                  1996
                                                         --------------      ----------------      ----------------
 <S>                                                     <C>                 <C>                   <C>    
 Operating activities:
   Net income ........................................   $   43,666,000      $     41,561,000      $     39,907,000
   Adjustments to reconcile net income to net
      cash provided by operating activities:
      Depreciation and amortization...................       12,148,000            11,711,000            10,981,000
      Minority interest in net income.................          441,000               420,000               403,000
      Deferred income taxes...........................          481,000               651,000               601,000
      Changes in working capital components:
        Accounts receivable...........................       (2,414,000)               37,000            (1,330,000)
        Prepaid expenses..............................          (14,000)              300,000            (3,067,000)
        Accounts payable and accrued expenses.........        3,174,000              (336,000)            1,697,000
        Deferred terminaling fees.....................          634,000                18,000               240,000
        Payable to general partner....................          642,000               432,000              (252,000)
                                                          -------------         -------------        --------------
           Net cash provided by operating activities..       58,758,000            54,794,000            49,180,000
                                                          -------------         -------------        --------------

Investing activities:
   Capital expenditures...............................       (9,401,000)          (10,641,000)           (7,075,000)
   Acquisitions of pipelines and terminals............      (44,410,000)                  -              (8,507,000)
   Other..............................................       (1,121,000)              313,000              (630,000)
                                                          -------------         --------------       --------------
           Net cash used in investing activities......      (54,932,000)          (10,328,000)          (16,212,000)
                                                          -------------         -------------        --------------
Financing activities:
   Changes in amounts due to/from
      general partner.................................        5,000,000               975,000             2,570,000
   Issuance of short-term and long-term debt..........       35,000,000                 -                73,000,000
   Payments of long-term debt and capital lease.......       (6,453,000)           (7,036,000)          (69,777,000)
   Distributions, including minority interest.........      (42,900,000)          (40,225,000)          (36,872,000)
                                                          -------------         -------------        --------------
           Net cash used in financing activities......       (9,353,000)          (46,286,000)          (31,079,000)
                                                          -------------         -------------        --------------
Increase (decrease) in cash and cash equivalents......       (5,527,000)           (1,820,000)            1,889,000
Cash and cash equivalents at beginning of period......        6,376,000             8,196,000             6,307,000
                                                          -------------         -------------        --------------
Cash and cash equivalents at end of period............    $     849,000         $   6,376,000        $    8,196,000
                                                          =============         =============        ==============
Supplemental information - Cash paid for interest.....    $  11,156,000         $  11,346,000        $   10,368,000
                                                          =============         =============        ==============
</TABLE>

<PAGE>


                 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
                  CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL

<TABLE>
<CAPTION>
                                                                      Limited          General
                                                                   Partners (a)        Partner            Total
                                                                  --------------    -------------    --------------
<S>                                                               <C>               <C>              <C>           
Partners' capital at January 1, 1996......................        $   99,750,000    $     998,000    $  100,748,000

1996 income allocation....................................            39,504,000          403,000        39,907,000

Distributions declared....................................           (36,938,000)        (377,000)      (37,315,000)
                                                                  --------------    -------------    --------------

Partners' capital at December 31, 1996....................           102,316,000        1,024,000       103,340,000

1997 income allocation....................................            41,001,000          560,000        41,561,000

Distributions declared....................................           (40,150,000)        (555,000)      (40,705,000)
                                                                  --------------    -------------    --------------

Partners' capital at December 31, 1997....................           103,167,000        1,029,000       104,196,000

1998 income allocation....................................            42,931,000          735,000        43,666,000

Distributions declared....................................           (41,756,000)        (718,000)      (42,474,000)
                                                                  --------------    -------------    --------------

Partners' capital at December 31, 1998....................        $  104,342,000    $   1,046,000    $  105,388,000
                                                                  ==============    =============    ==============

Limited partnership units outstanding at
  December 31, 1998, 1997 and 1996........................            16,060,000              (b)        16,060,000
                                                                  ==============    =============    ==============

</TABLE>
(a)      Prior to the third quarter of 1998, the  Partnership  had three classes
         of partnership interests designated Senior Preference Units, Preference
         Units and  Common  Units,  respectively.  Pursuant  to the  Partnership
         Agreement,  on August 14, 1998, each such class of units were converted
         into a single class  designated  "Units",  effective  July 1, 1998. See
         Note 2.

(b)      KPL owns a combined 2% interest in the Partnership as General Partner.


<PAGE>


                 KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    PARTNERSHIP ORGANIZATION

               Kaneb Pipe Line Partners,  L.P. ("KPP" or the  "Partnership"),  a
      master limited partnership, owns and operates a refined petroleum products
      pipeline  business and a petroleum  products and specialty liquids storage
      and terminaling business. The Partnership operates through Kaneb Pipe Line
      Operating  Partnership,  L.P. ("KPOP"), a limited partnership in which the
      Partnership  holds a 99%  interest  as  limited  partner.  Kaneb Pipe Line
      Company (the "Company"), a wholly-owned subsidiary of Kaneb Services, Inc.
      ("Kaneb"), as general partner, holds a 1% general partner interest in both
      the  Partnership  and KPOP. The Company's 1% interest in KPOP is reflected
      as the  minority  interest in the  financial  statements.  At December 31,
      1998, the Company, together with its affiliates,  owned an approximate 31%
      interest as a limited partner and as a general partner owned a combined 2%
      interest.


2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

               The following significant accounting policies are followed by the
      Partnership in the preparation of the consolidated  financial  statements.
      The preparation of the  Partnership's  financial  statements in conformity
      with generally accepted accounting  principles requires management to make
      estimates and assumptions  that affect the reported  amounts of assets and
      liabilities  and  disclosures of contingent  assets and liabilities at the
      date of the financial  statements and the reported amounts of revenues and
      expenses  during the reporting  period.  Actual  results could differ from
      those estimates.

      Cash and cash equivalents

               The  Partnership's  policy  is to invest  cash in  highly  liquid
      investments with original maturities of three months or less. Accordingly,
      uninvested cash balances are kept at minimum levels.  Such investments are
      valued at cost,  which  approximates  market,  and are  classified as cash
      equivalents.  The  Partnership  does  not have  any  derivative  financial
      instruments.

      Property and equipment

               Property and equipment are carried at  historical  cost.  Certain
      leases have been  capitalized  and the leased assets have been included in
      property and equipment.  Additions of new equipment and major renewals and
      replacements  of existing  equipment  are  capitalized.  Repairs and minor
      replacements that do not materially increase values or extend useful lives
      are  expensed.  Depreciation  of property  and  equipment is provided on a
      straight-line  basis at rates based upon expected  useful lives of various
      classes of assets, as disclosed in Note 4. The rates used for pipeline and
      storage  facilities  of  KPOP  are the  same  as  those  which  have  been
      promulgated by the Federal Energy Regulatory Commission.

      Revenue and income recognition

               KPOP  provides  pipeline   transportation  of  refined  petroleum
      products and liquified petroleum gases. Revenue is recognized upon receipt
      of the products into the pipeline system.

               The  Partnership's  Support  Terminal  Services  operation ("ST")
      provides terminaling and other ancillary services. Storage fees are billed
      one month in advance  and are  reported  as  deferred  income.  Revenue is
      recognized in the month services are provided.


      Environmental matters

               Environmental  expenditures that relate to current operations are
      expensed or capitalized,  as appropriate.  Expenditures  that relate to an
      existing condition caused by past operations,  and which do not contribute
      to current or future revenue  generation,  are expensed.  Liabilities  are
      recorded  when  environmental  assessments  and/or  remedial  efforts  are
      probable, and the costs can be reasonably estimated. Generally, the timing
      of these accruals  coincides with the completion of a feasibility study or
      the Partnership's commitment to a formal plan of action.

      Income tax considerations

      Income before income tax expense is made up of the following components:

<TABLE>
<CAPTION>
                                                                              Year Ended December 31,
                                                          ---------------------------------------------------------
                                                              1998                  1997                  1996
                                                          -------------         -------------        --------------

      <S>                                                 <C>                   <C>                  <C>           
      Partnership operations.........................     $  42,827,000         $  40,317,000        $   37,950,000
      Corporate operations...........................         1,257,000             1,962,000             2,779,000
                                                          -------------         -------------        --------------
                                                          $  44,084,000         $  42,279,000        $   40,729,000
                                                          =============         =============        ==============
</TABLE>

               Partnership operations are not subject to Federal or state income
      taxes.   However,   certain   operations  of  ST  are  conducted   through
      wholly-owned  corporate  subsidiaries  which  are  taxable  entities.  The
      provision for income taxes for the periods ended  December 31, 1998,  1997
      and 1996 primarily  consists of deferred U.S.  Federal income taxes of $.5
      million, $.7 million and $.6 million,  respectively.  The net deferred tax
      liability  of $3.6 million and $3.1 million at December 31, 1998 and 1997,
      respectively,  consists of deferred  tax  liabilities  of $8.8 million and
      $8.2  million,  respectively,  and deferred tax assets of $5.2 million and
      $5.2 million, respectively. The deferred tax liabilities consist primarily
      of tax  depreciation in excess of book  depreciation  and the deferred tax
      assets consist primarily of net operating losses. The corporate operations
      have  net  operating  loss   carryforwards   for  tax  purposes   totaling
      approximately $14.4 million which expire in years 2008 through 2013.

               Since the income or loss of the  operations  which are  conducted
      through  limited  partnerships  will be included in the tax returns of the
      individual partners of the Partnership,  no provision for income taxes has
      been recorded in the accompanying  financial statements on these earnings.
      The tax returns of the  Partnership  are subject to examination by Federal
      and  state  taxing  authorities.   If  any  such  examination  results  in
      adjustments  to  distributive  shares of taxable  income or loss,  the tax
      liability of the partners would be adjusted accordingly.

               The tax attributes of the  Partnership's net assets flow directly
      to each  individual  partner.  Individual  partners  will  have  different
      investment  bases  depending  upon the timing and prices of acquisition of
      Partnership  units.  Further,  each  partner's  tax  accounting,  which is
      partially  dependent upon their  individual tax position,  may differ from
      the accounting followed in the financial  statements.  Accordingly,  there
      could be significant  differences  between each  individual  partner's tax
      basis and their  proportionate  share of the net  assets  reported  in the
      financial statements. Statement of Financial Accounting Standards ("SFAS")
      No. 109,  "Accounting for Income Taxes," requires disclosure by a publicly
      held  partnership  of the  aggregate  difference  in the  basis of its net
      assets for  financial  and tax  reporting  purposes.  Management  does not
      believe that, in the Partnership's circumstances, the aggregate difference
      would be meaningful information.

      Cash distributions

               The  Partnership  makes  quarterly  distributions  of 100% of its
      Available  Cash, as defined in the  Partnership  Agreement,  to holders of
      limited partnership units ("Unitholders") and the Company.  Available Cash
      consists  generally of all the cash receipts of the  Partnership  plus the
      beginning  cash balance less all of its cash  disbursements  and reserves.
      The Partnership expects to make distributions of all Available Cash within
      45 days  after the end of each  quarter  to  Unitholders  of record on the
      applicable record date.  Distributions of $2.60,  $2.50 and $2.30 per Unit
      were   declared  to  all  classes  of  Units  in  1998,   1997  and  1996,
      respectively.

               Distributions  by the  Partnership of its Available Cash are made
      99% to  Unitholders  and 1% to the  Company,  subject  to the  payment  of
      incentive distributions to the General Partner if certain target levels of
      cash  distributions  to the Unitholders are achieved.  The distribution of
      Available Cash for each quarter during the Preference  Period, as defined,
      was  subject  to the  preferential  rights of the  holders  of the  Senior
      Preference  Units ("SPUs") to receive the Minimum  Quarterly  Distribution
      for such  quarter,  plus any  arrearages  in the  payment  of the  Minimum
      Quarterly  Distribution  for prior  quarters,  before any  distribution of
      Available  Cash was made to holders of Preference  Units ("PUs") or Common
      Units ("CUs") for such  quarter.  The CU's were not entitled to arrearages
      in the  payment of the Minimum  Quarterly  Distribution.  In general,  the
      Preference  Period  continued  until  such time as the  Minimum  Quarterly
      Distribution  had been paid to the holders of the SPU's,  the PU's and the
      CU's for twelve  consecutive  quarters.  Payment  of the  August 14,  1998
      regular cash distribution  represented the twelfth  consecutive  quarterly
      distribution  of Available Cash  constituting  Cash from  Operations in an
      amount  equal to or  exceeding  the $.55  Minimum  Quarterly  Distribution
      specified in the Partnership Agreement. Accordingly, pursuant to the terms
      of the Partnership  Agreement,  all differences and  distinctions  between
      SPU's, PU's and CU's  automatically  ceased as of such date. At that time,
      all outstanding units of limited  partnership  interest in the Partnership
      became "Units,"  constituting a single class of equity  securities,  which
      trade on the New York Stock Exchange under the symbol "KPP".

      Allocation of net income and earnings

             For the periods  presented,  net income or loss has been  allocated
      between limited  partner  interests and the general partner pro rata based
      on the aggregate amount of cash distributions  declared (including general
      partner incentive distributions).  Beginning in 1997, distributions by the
      Partnership of Available Cash reached the Second Target  Distribution,  as
      defined in the Partnership  Agreement,  which entitled the general partner
      to  certain   incentive   distributions   at  different   levels  of  cash
      distributions.  Earnings per Unit shown on the consolidated  statements of
      income are calculated by dividing the amount of limited partners' interest
      in net income, by the weighted average number of Units outstanding. If the
      allocation  of income had been made as if all income had been  distributed
      in cash,  earnings  per Unit would have been $2.66 and $2.53 for the years
      ended December 31, 1998 and 1997, respectively.

      Change in presentation

            Certain prior year financial statement items have  been reclassified
      to conform with the 1998 presentation.


3.    ACQUISITIONS

              On October  30,  1998,  the  Partnership,  through a  wholly-owned
      subsidiary,  entered into  acquisition  and joint venture  agreements with
      Northville  Industries  Corp.  ("Northville")  to  acquire  and manage the
      former  Northville  terminal  located in  Linden,  New  Jersey.  Under the
      agreements, the Partnership acquired a 50% interest in the newly-formed ST
      Linden  Terminal  LLC  for  $20.5  million  plus  transaction  costs.  The
      investment was financed by the  Partnership's  existing  revolving  credit
      facility  and  a  revolving  promissory  note.  The  investment  is  being
      accounted  for by the equity  method of  accounting,  with the excess cost
      over net book value of the equity investment being amortized over the life
      of the  underlying  assets.  During 1998, the  Partnership  acquired other
      terminals and pipelines for aggregate  consideration of $23.9 million. The
      pro  forma  effects  of  these  acquisitions,   including  the  Northville
      transaction, were not material.

            On  February 1, 1999,  the  Partnership,  through  two  wholly-owned
      indirect  subsidiaries,  acquired six terminals in the United Kingdom from
      GATX  Terminal  Limited  for  (pound)22.6  million   (approximately  $37.4
      million) plus transaction costs and the assumption of certain liabilities.
      The  acquisition was financed with term loans from a bank. The acquisition
      will be  accounted  for,  beginning in February  1999,  using the purchase
      method of accounting.

4.    PROPERTY AND EQUIPMENT

      The cost of property and equipment is summarized as follows:

<TABLE>
<CAPTION>
                                                        Estimated
                                                         Useful
                                                          Life                             December 31,
                                                         (Years)              -------------------------------------
                                                                                    1998                  1997
                                                     --------------           ---------------        --------------
      <S>                                               <C>                     <C>                  <C>           
      Land..................................                -                   $  19,744,000        $   18,663,000
      Buildings.............................               35                       7,626,000             6,728,000
      Furniture and fixtures................               16                       2,710,000             2,509,000
      Transportation equipment..............                6                       4,131,000             3,687,000
      Machinery and equipment...............             20 - 40                   31,226,000            28,507,000
      Pipeline and terminaling equipment....             20 - 40                  305,745,000           259,467,000
      Pipeline equipment under
        capitalized lease...................             20 - 40                        -                22,513,000
      Investment in ST Linden
        Terminal LLC........................               25                      21,005,000                 -
      Construction work-in-progress.........                -                       6,066,000             3,728,000
                                                                                -------------        --------------
      Total property and equipment..........                                      398,253,000           345,802,000
      Accumulated depreciation..............                                     (108,622,000)          (98,670,000)
                                                                                -------------        --------------
      Net property and equipment............                                    $ 289,631,000        $  247,132,000
                                                                                =============        ==============
</TABLE>

            In December 1998, the  Partnership  exercised its option to purchase
      pipeline equipment  previously held under a capital lease for $5.1 million
      in cash.


5.    DEBT

            In October  1998, a  wholly-owned  subsidiary  of KPP entered into a
      Promissory  Note  Agreement  with a bank that,  as amended on  February 1,
      1999,  provides for a $15 million  revolving credit  availability  through
      June 30, 1999.  The Promissory  Note Agreement  bears interest at variable
      interest  rates and has a commitment  fee of 0.35% per annum of the unused
      available balance. At December 31, 1998, $10.0 million was drawn under the
      Promissory Note Agreement and included in current liabilities.

      Long-term debt is summarized as follows:

<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                              -------------------------------------       
                                                                                    1998                  1997
                                                                              ---------------        --------------
      <S>                                                                     <C>                    <C>           
      First mortgage notes due 2001 and 2002..........................        $    60,000,000        $   60,000,000
      First mortgage notes due 2001 through 2016......................             68,000,000            68,000,000
      Obligation under capital lease..................................                  -                 6,453,000
      Revolving credit facility.......................................             25,000,000                -
                                                                                -------------        --------------
      Total long-term debt............................................            153,000,000           134,453,000
      Less current portion............................................                  -                 2,335,000
                                                                                -------------        --------------
      Long-term debt, less current portion............................          $ 153,000,000        $  132,118,000
                                                                                =============        ==============
</TABLE>

               In 1994, a wholly-owned subsidiary entered into a restated credit
      agreement with a group of banks that, as subsequently amended,  provides a
      $25 million revolving credit facility through January 31, 2001. The credit
      facility  bears  interest at variable  interest rates and has a commitment
      fee of 0.15% per annum of the unused  credit  facility.  At  December  31,
      1998, $25.0 million was drawn under the credit facility.

               Also, in 1994, another wholly-owned subsidiary of the Partnership
      issued  $33  million  of  first  mortgage  notes  ("Notes")  to a group of
      insurance  companies.  The Notes  bear  interest  at the rate of 8.05% per
      annum and are due on December 22, 2001. In 1995,  the  Partnership  issued
      $27 million of additional  Notes due February 24, 2002 which bear interest
      at the rate of 8.37% per  annum.  The Notes and the  credit  facility  are
      secured by a mortgage on the East Pipeline and contain  certain  financial
      and operational covenants.

               In June 1996,  the  Partnership  issued $68  million of new first
      mortgage  notes  bearing  interest at rates  ranging  from 7.08% to 7.98%.
      $35.0  million of these notes is due June 2001,  $8.0  million is due June
      2003,  $10.0  million is due June 2006 and $15.0 million is due June 2016.
      The loan is  secured,  pari  passu  with the  existing  Notes  and  credit
      facility, by a mortgage on the East Pipeline.


6.    COMMITMENTS AND CONTINGENCIES

            The  following  is a  schedule  by years  of  future  minimum  lease
      payments under operating leases as of December 31, 1998:

         Year ending December 31:

              1999.........................................    $   1,355,000
              2000.........................................        1,341,000
              2001.........................................        1,261,000
              2002.........................................        1,082,000
              2003.........................................        1,088,000
              Thereafter...................................        1,023,000
                                                               -------------
              Total minimum lease payments.................    $   7,150,000
                                                               =============

            Total rent expense under operating  leases amounted to $1.1 million,
      $1.3 million and $1.2 million for the years ended December 31, 1998,  1997
      and 1996, respectively.

            The operations of the Partnership are subject to Federal,  state and
      local laws and  regulations  relating to  protection  of the  environment.
      Although the Partnership believes its operations are in general compliance
      with applicable environmental  regulations,  risks of additional costs and
      liabilities  are inherent in pipeline and terminal  operations,  and there
      can be no assurance that  significant  costs and  liabilities  will not be
      incurred  by  the  Partnership.   Moreover,  it  is  possible  that  other
      developments,   such  as  increasingly   stringent   environmental   laws,
      regulations and enforcement policies thereunder, and claims for damages to
      property or persons  resulting  from the  operations  of the  Partnership,
      could result in substantial costs and liabilities to the Partnership.  The
      Partnership has recorded an undiscounted  reserve for environmental claims
      in the amount of $5.3 million at December 31, 1998, including $4.5 million
      related to  acquisitions  of pipelines  and  terminals.  During 1998,  the
      Partnership  incurred  $0.6 million of costs  related to such  acquisition
      reserves and reduced the liability accordingly.

              The Company has indemnified the  Partnership  against  liabilities
      for damage to the  environment  resulting from  operations of the pipeline
      prior to October 3, 1989 (the date of formation of the  Partnership).  The
      indemnification  does not extend to any liabilities  that arise after such
      date  to  the  extent  that  the   liabilities   result  from  changes  in
      environmental laws and regulations.

              In December 1995, the Partnership acquired the liquids terminaling
      assets  of  Steuart  Petroleum  Company  and  certain  of  its  affiliates
      (collectively,   "Steuart").  The  asset  purchase  agreement  includes  a
      provision  for an  earn-out  payment  based  upon  revenues  of one of the
      terminals  exceeding a specified amount for a seven-year  period ending in
      December 2002. No amount was payable under the earn-out provision in 1996,
      1997 and 1998.

              Certain  subsidiaries  of  the  Partnership  are  defendants  in a
      lawsuit  filed in a Texas state court in 1997 by Grace Energy  Corporation
      ("Grace"),  the  entity  from whom the  Partnership  acquired  ST in 1993,
      involving  certain  issues  allegedly  arising  out of  the  Partnership's
      acquisition   of  ST.   Grace   alleges   that  the   defendants   assumed
      responsibility for certain  environmental  damages to a former ST facility
      located  in   Massachusetts   that   occurred  at  a  time  prior  to  the
      Partnership's  acquisition  of ST. The  defendants  have also received and
      responded to inquiries  from two  governmental  authorities  in connection
      with the same allegation by Grace. The defendants'  consistent position is
      that it did not  acquire  the  facility in question as part of the 1993 ST
      transaction and,  consequently,  did not assume any responsibility for the
      environmental damage. The case is set for trial in June, 1999.

              The Partnership has other  contingent  liabilities  resulting from
      litigation,  claims and  commitments  incident to the  ordinary  course of
      business.  Management believes,  based on the advice of counsel,  that the
      ultimate resolution of such contingencies,  including the Grace litigation
      described  above,  will  not  have  a  materially  adverse  effect  on the
      financial position or results of operations of the Partnership.


7.    RELATED PARTY TRANSACTIONS

               The Partnership has no employees and is managed and controlled by
      the Company.  The Company and Kaneb are entitled to  reimbursement  of all
      direct and  indirect  costs  related  to the  business  activities  of the
      Partnership.  These costs, which totaled $11.3 million,  $10.8 million and
      $10.5  million  for the years  ended  December  31,  1998,  1997 and 1996,
      respectively,  include  compensation  and  benefits  paid to officers  and
      employees  of the  Company  and Kaneb,  insurance  premiums,  general  and
      administrative costs, tax information and reporting costs, legal and audit
      fees.  Included  in this  amount is $9.3  million,  $9.0  million and $8.4
      million of  compensation  and benefits,  paid to officers and employees of
      the  Company  for the  years  ended  December  31,  1998,  1997 and  1996,
      respectively,  which  represent the actual  amounts paid by the Company or
      Kaneb. In addition,  the Partnership paid $.2 million during each of these
      respective  years  for an  allocable  portion  of the  Company's  overhead
      expenses.  At December 31, 1998 and 1997, the Partnership owed the Company
      $1.8 million and $1.1 million,  respectively, for these expenses which are
      due under normal invoice terms.  Additionally,  at December 31, 1998, $5.0
      million was  payable to the Company  under a  short-term  promissory  note
      agreement. The promissory note, which accrued interest at 6.75% per annum,
      was repaid in February 1999.


8.    BUSINESS SEGMENT DATA

            The following  information is presented in accordance  with SFAS No.
      131, "Disclosures about Segments of an Enterprise and Related Information"
      ("SFAS No. 131"). The  Partnership's  adoption of SFAS No. 131,  effective
      January 1, 1998 and applied  retroactively,  did not alter the composition
      of its reportable operating segments.

              The   Partnership   conducts   business   through  two   principal
      operations;  the "Pipeline  Operations,"  which consists  primarily of the
      transportation of refined petroleum products in the Midwestern states as a
      common carrier,  and the "Terminaling  Operations,"  which provide storage
      for petroleum products, specialty chemicals and other liquids. At December
      31,  1998,  all  Pipeline  and   Terminaling   Operations  were  conducted
      domestically.

           The Partnership  measures segment profit as operating  income.  Total
assets are those assets controlled by each reportable segment.
<TABLE>
<CAPTION>

                                                                                  Year Ended December 31,
                                                                ------------------------------------------------------ 
                                                                       1998                1997              1996
                                                                ----------------    ---------------     --------------
     <S>                                                        <C>                 <C>                 <C>    
     Business segment revenues:
       Pipeline operations....................................  $     63,421,000    $    61,320,000     $   63,441,000
       Terminaling operations.................................        62,391,000         59,836,000         54,113,000
                                                                ----------------    ---------------     --------------
                                                                $    125,812,000    $   121,156,000     $  117,554,000
                                                                ================    ===============     ==============
     Business segment profit:
       Pipeline operations....................................  $     33,630,000    $    31,827,000     $   32,221,000
       Terminaling operations.................................        21,573,000         21,642,000         19,168,000
                                                                ----------------    ---------------     --------------
         Operating income.....................................        55,203,000         53,469,000         51,389,000
       Interest expense.......................................       (11,304,000)       (11,332,000)       (11,033,000)
       Interest and other income .............................           626,000            562,000            776,000
                                                                ----------------    ---------------     --------------
         Income before minority interest and income taxes.....  $     44,525,000    $    42,699,000     $   41,132,000
                                                                ================    ===============     ==============
     Business segment assets:
       Depreciation and amortization:
         Pipeline operations..................................  $      4,619,000    $     4,885,000     $    4,817,000
         Terminaling operations...............................         7,529,000          6,826,000          6,164,000
                                                                ----------------    ---------------     --------------
                                                                $     12,148,000    $    11,711,000     $   10,981,000
                                                                ================    ===============     ==============

       Capital   expenditures   (including   capitalized  
         leases  and  excluding acquisitions):
         Pipeline operations..................................  $      5,020,000    $     4,496,000     $    3,446,000
         Terminaling operations...............................         4,381,000          6,145,000          3,629,000
                                                                ----------------    ---------------     --------------
                                                                $      9,401,000    $    10,641,000     $    7,075,000
                                                                ================    ===============     ==============

                                                                                       December 31,
                                                                ------------------------------------------------------
                                                                      1998                1997               1996
                                                               ----------------    ---------------     --------------
       Total assets:
         Pipeline operations..................................  $    103,966,000    $    97,666,000     $  102,391,000
         Terminaling operations...............................       204,466,000        171,366,000        172,374,000
                                                                ----------------    ---------------     --------------
                                                                $    308,432,000    $   269,032,000     $  274,765,000
                                                                ================    ===============     ==============
</TABLE>

 9.   FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK

              The  estimated  fair value of all debt as of December 31, 1998 and
      1997 was approximately  $171 million and $134 million,  as compared to the
      carrying value of $163 million and $128 million, respectively.  These fair
      values were estimated using  discounted  cash flow analysis,  based on the
      Partnership's  current  incremental  borrowing  rates for similar types of
      borrowing arrangements.  These estimates are not necessarily indicative of
      the amounts that would be realized in a current market exchange.
      The Partnership has no derivative financial instruments.

              The Partnership markets and sells its services to a broad base  of
      customers and performs  ongoing credit  evaluations of its customers.  The
      Partnership does not believe it has a significant concentration of  credit
      risk at December 31, 1998. No customer  constituted 10 percent or more  of
      consolidated revenues in 1998, 1997 or 1996.


 10.  QUARTERLY FINANCIAL DATA (unaudited)

      Quarterly operating results for 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>

                                                                            Quarter Ended
                                            -------------------------------------------------------------------------- 
                                                March 31,           June 30,          September 30,      December 31,
                                            ----------------    ----------------    ---------------     -------------- 
      <S>                                   <C>                 <C>                 <C>                 <C> 
      1998:
        Revenues......................      $     28,070,000    $     30,553,000    $    33,709,000     $   33,480,000
                                            ================    ================    ===============     ==============

        Operating income..............      $     11,900,000    $     12,946,000    $    15,710,000     $   14,647,000
                                            ================    ================    ===============     ==============

        Net income....................      $      8,960,000    $     10,030,000    $    12,598,000     $   12,078,000
                                            ================    ================    ===============     ==============

        Allocation of net income
          per Unit....................      $            .55    $            .61    $           .77     $          .74
                                            ================    ================    ===============     ==============

      1997:
        Revenues......................      $     28,579,000    $     29,793,000    $    31,465,000     $   31,319,000
                                            ================    ================    ===============     ==============

        Operating income..............      $     12,029,000    $     12,919,000    $    13,956,000     $   14,565,000
                                            ================    ================    ===============     ==============

        Net income....................      $      8,907,000    $      9,949,000    $    10,975,000     $   11,730,000
                                            ================    ================    ===============     ==============

        Allocation of net income
          per Unit....................      $            .55    $            .61    $           .68     $          .71
                                            ================    ================    ===============     ==============
</TABLE>


<PAGE>


                        REPORT OF INDEPENDENT ACCOUNTANTS



To the Partners of
Kaneb Pipe Line Partners, L.P.


We have audited the 1998  consolidated  financial  statements of Kaneb Pipe Line
Partners,  L.P. and its subsidiaries (the  "Partnership") as listed in the index
appearing  under  Item  14(a)(1)  on  page  29.  These  consolidated   financial
statements  are  the  responsibility  of  the  Partnership's   management.   Our
responsibility is to express an opinion on the consolidated financial statements
based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards  require that we plan and perform the audit to obtain reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial position of the Partnership as
of December 31, 1998,  and the results of its  operations and its cash flows for
the  year  then  ended,  in  conformity  with  generally   accepted   accounting
principles.


KPMG LLP
Dallas, Texas
February 25, 1999


<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS




To the Partners of
Kaneb Pipe Line Partners, L.P.


In our opinion,  the  consolidated  balance  sheet and the related  consolidated
statements  of income,  of cash flows and of changes in partners'  capital as of
and for each of the two years in the period  ended  December 31, 1997 (listed in
the index  appearing  under Item  14(a)(1)  on page 29) present  fairly,  in all
material respects, the financial position,  results of operations and cash flows
of Kaneb Pipe Line Partners, L.P. and its subsidiaries (the "Partnership") as of
and for  each of the two  years  in the  period  ended  December  31,  1997,  in
conformity  with  generally  accepted  accounting  principles.  These  financial
statements  are  the  responsibility  of  the  Partnership's   management;   our
responsibility  is to express an opinion on these financial  statements based on
our audits.  We conducted  our audits of these  statements  in  accordance  with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable  assurance about whether the financial statements are
free of material  misstatement.  An audit includes  examining,  on a test basis,
evidence  supporting the amounts and  disclosures  in the financial  statements,
assessing the  accounting  principles  used and  significant  estimates  made by
management,  and evaluating the overall  financial  statement  presentation.  We
believe  that our audits  provide a reasonable  basis for the opinion  expressed
above. We have not audited the consolidated  financial  statements of Kaneb Pipe
Line Partners,  L.P. and its subsidiaries for any period  subsequent to December
31, 1997.


PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
February 19, 1998


<PAGE>
                                   SIGNATURES

            Pursuant  to  the  requirements  of  Section  13 or 15  (d)  of  the
      Securities  Exchange Act of 1934, Kaneb Pipe Line Partners,  L.P. has duly
      caused  this  report  to be  signed  on its  behalf  by  the  undersigned,
      thereunto duly authorized.

                                         KANEB PIPE LINE PARTNERS, L.P.
                                         By:      Kaneb Pipe Line Company
                                                  General Partner

                                        By:       EDWARD D. DOHERTY
                                                  Chairman of the Board and
                                                  Chief  Executive Officer
                                                  Date:    March 25, 1999

         Pursuant to the  requirements  of the  Securities  and  Exchange Act of
1934,  this report has been signed below by the  following  persons on behalf of
Kaneb  Pipe Line  Partners,  L.P.  and in the  capacities  with  Kaneb Pipe Line
Company and on the date indicated.

      Signature                    Title                               Date

Principal Executive Officer
EDWARD D. DOHERTY            Chairman of the Board               March 25, 1999
                             and Chief Executive Officer

Principal Accounting Officer
JIMMY L. HARRISON            Controller                          March 25, 1999

Directors

SANGWOO AHN                  Director                            March 25, 1999

JOHN R. BARNES               Director                            March 25, 1999

M.R. BILES                   Director                            March 25, 1999

FRANK M. BURKE, JR.          Director                            March 25, 1999

CHARLES R. COX               Director                            March 25, 1999

HANS KESSLER                 Director                            March 25, 1999

JAMES R. WHATLEY             Director                            March 25, 1999



<PAGE>


                                  EXHIBIT INDEX


Exhibit
Number                Description                 
-------   ----------------------------------------------------------------------
10.5      TCB Security Agreement

10.9      Formationand  Purchase  Agreement,  between and among Support Terminal
          Operating Partnership, L.P., Northville Industries Corp. and AFFCO, 
          Corp., dated October 30, 1998

10.10     Agreement, between and among,  GATX  Terminals  Limited,  ST Services,
          Ltd., ST Eastham, Ltd., GATX Termianls Corporation,  Support Terminals
          Operating Partnership, L.P. and Kaneb Pipe Line Partners, L.P., dated 
          January 26, 1999

10.11     Credit  Agreement,  between and among,  Kaneb Pipe Line  Operating  
          Partnership, L.P.,  ST Services,  Ltd. and Suntrust  Bank,  Atlanta,  
          dated January 27, 1999

22        List of Subsidiaries, filed herewith.

27        Financial Data Schedule, filed herewith.